The Canadian Dollar’s multi-year decline appears to be finally finding support among the global commercial trader community. While the Canadian Dollar’s 2007 high near $1.06 was commodity-driven, the last meaningful high was the 2011 peak near $1.03. The Canadian Dollar fell by nearly 15% over the previous five years including 19 out of the last 23 months. Unfailingly, the commodity gods take away just as they gave and the Canadian Dollar is now trading at the same prices it was 13 years ago. This decline has finally brought the global currency dealers back to the buy side. This week, we’ll examine the effect their return should have on the market as well as the technical pattern it could trigger.
First, we have to separate the macro from the micro. We’ve already drawn some broad-brush strokes, but there’s one more important point to make before proceeding to the micro aspect of the trade setup. The commercial traders are value-based players whose decisions in the market are determined by their business needs. A look at a weekly or, monthly Canadian Dollar chart shows a spike in commercial buying approximately every five percent lower on the market’s multi-year fall. These periods of commercial buying are directly responsible for the support seen in the sideways portions of the staircase decline. Finally, understand that their business models play out over multi-year periods. Thus, much of the recent buying has been offsets of their record net short position and total position established above $1 in September of 2012.
Now, we’re ready to leverage the commercial traders’ actions into an appropriate swing trading technique. We base our approach on using the Commitments of Traders data to determine market imbalance as defined by the spread between the commercial and speculative traders at the market’s support and resistance levels. The idea is to let the speculators drive the market up and down within the commercial traders’ aggregate value areas. When the market is above or, below value, the commercial traders tend to come in and push the market back in favor of their momentum trend. Finally, using our proprietary momentum trigger to signal the trades puts in the position of buying declines and selling rallies as the entry for our swing trading or, mean reversion strategy.
Currently, the commercial traders in the Canadian Dollar are net long for the first time since March. Furthermore, their buying is picking up steam in both frequency and amplitude. They’ve been buyers for four straight weeks and last week’s net purchases were the largest since February of 2013. Finally, their current total position is a mere 70k contracts, and the commercial traders’ tendency is to add contracts into expiration with total positions of more than 150k in two-thirds of the expirations over the last two years. Obviously, we see the commercial traders’ actions as friendly to the buy-side. We sent out a Discretionary COT Buy signal on, 9/21 and we see this as one to stick with unless the market violates the developed channel as seen on the chart, now at $.75. This trade has real potential to push through the topside and test the summer’s high.
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