The Canadian Dollar was trading above $.94 as recently as June. This has provided a clear picture of what can happen to an unevenly balanced economy whose currency value has become pegged to any individual sector. The global economy slow down and the associated decline in oil has absolutely pounded the Canadian Dollar to the tune of a 15% haircut in six months. That’s a very large move in a first world currency. Fortunately, we can use the commercial traders’ forecasts derived from the CFTC’s weekly Commitment of Traders report to keep us on the look out for the big moves and out of harm’s way.
The first point to make is that we only take trades in the established direction of the commercial traders’ momentum. Therefore, we spent the first half of the year looking for selling opportunities as the commercial traders sold more than 100,000 contracts through June of 2014 between $.89 and $.93 cents to the U.S. Dollar.
You can see on the chart below that commercial traders were quick to cover a little more than half of their short position through fall’s decline between $.87 and $.91 cents to the Dollar. This left them comfortably short for most of the decline and leads us to our current situation.
Commercial traders now appear to be once again interested in the long side of the Canadian Dollar trade. Their recent purchases of approximately 15,000 contracts has been strong enough to turn momentum’s tide and put us on the lookout for buy signals like the one generated last night. We’re not sure how all of the global banking variables are going to sort themselves out over the coming year but, we do see this as a supported trading opportunity on the long side of an oversold first world currency.
Monday began with an official COT Sell signal in the U.S. Dollar Index that we published in TraderPlanet. This trade was actually a follow up to the previous week’s piece also published in TraderPlanet.
We combined these into one post including the annotated US Dollar Index chart in – The USD Index – A Speculative Bull Trap?
This was our U.S. Dollar Index piece posted at TraderPlanet on Monday. It seems there was an issue with the chart.
The piece actually begins with our January 5th article when we saw the commercial trading position getting out of whack as based on the Commodity Futures Trading Commission’s weekly Commitment of Traders reports. Our initial discussion can be found here.
We updated it this week with the following piece, chart and trading signal.
The USD Index – A Small Washout Coming? – Our Piece for TraderPlanet
More specifically, this piece should be titled, “Diminishing Effects of Global Quantitative Easing in a Long Only Portfolio,” but that seemed a little long. Have we returned to an era where bad economic news guarantees the action of sovereign nations to prop their markets up? Does bad news make front running the Bank of Japan’s direct equity purchases a sure thing? Have we globalized the, “Bernanke Put?” The European Central Bank, the Bank of Japan and the Peoples’ Bank of China have all enacted accommodative interest rate policies since September 8th. Since then, the various global equity markets had all sold off and are now at or near new highs.
The U.S. Dollar has been the best house in a bad neighborhood since the U.S. Federal Reserve Board announced its intentions to taper the U.S. economy off of its monthly stimulus supplements. Protracted issues in Ukraine and the sanctions levied against Russia have created a major capital flight from Eastern Europe as a whole. The European Union recently announced its own form of Quantitative Easing and finally, on Halloween, Japan dropped the mother of currency bombs. Their announcement that they would not only invoke another round of currency destruction but would also become direct investment participants in their own stock markets created a shock through the investment landscape that I’ve not heard in non-crisis times.
The weekly Commitment of Traders report published by the Commodity Futures Trading Commission tracks the markets’ players of consequence. The report breaks down the actions of the commodity index funds, managed money, small speculators and finally, the commercial traders. For the purpose of this article, we’ll focus on the commercial trader category. I’ve been reading these reports for twenty years and there’s a phenomenon that I’ve counted now 13 times in the S&P 500 futures that is usually tied to the expiration of the quarterly contracts. This setup has had a 76% forecasting accuracy for the period in which we measured its effectiveness. Most importantly, we find ourselves in the middle of this rare event even as we speak.
Five years ago the financial world was coming to an end. The stock market tanked and interest rates went negative due to the unsurpassed flight to safety in U.S. Treasuries. Most of this was due to greedy lending practices that claimed to be championing President Clinton’s thesis that everyone in America should be able to own a home. Lax lending requirements that were intended to get lower income earners into their own homes travelled up market and allowed upper middle and upper tier earners to refinance their houses at artificially low rates to buy second homes and Harley’s. Once again, misguided bureaucratic endeavors have been perverted by greed. The roaches in China are beginning to surface and the banking system stress tests in Europe are uncovering the depth of this five-year-old issue and once again, the primary beneficiary of these actions will be the U.S. Dollar.