USD/CAD: Is a bottom near?

There are numerous indicators of at least a short-term bottom in USD/CAD...


 “Those who pick bottoms get stinky fingers”

“Only baboons pick bottoms”

These memorable, if rather lewd, trading aphorisms serve as a reminder of the risks when betting against established downtrends. While trading against a trend tends to be a lower-probability strategy, it can offer strong risk/reward ratios if the stars align, and the current setup in USD/CAD may present an opportunity to do just that.

Fundamentally speaking, the ongoing strength in the Canadian dollar is relatively easy to explain. The price of oil, Canada’s most important export, has consistently moved higher over the last year, and WTI on the verge of breaking out to a nearly 3-year high above $67 as of writing. Meanwhile, short-term Canadian yields have actually risen more than their US counterparts over the last year, signaling investor confidence in the economic recovery and the potential for the Bank of Canada to raise interest rates earlier than most of the developed world.

Looking at the chart, USD/CAD has been grinding relentlessly lower for more than a year since peaking above 1.46 amidst last March’s COVID-driven “flight to safety” surge in the US dollar. The pair has fallen about 2,500 pips over that period, with the 50-day EMA reliably capping short-term rallies since last October.

Notably, rates fell more than 350 pips below their 50-day EMA earlier this month and are still trading more than 200 pips below that medium-term trend measure as we go to press. Over the last year, USD/CAD has consistently formed at least a near-term bottom any time it fell more than 300 pips below its 50-day EMA.

In addition, as my colleague Matt Simpson noted earlier this week, speculators are more bullish on the loonie (bearish on USD/CAD) than they’ve been at any point in the last 18 months according to the CFTC’s Commitment of Traders report; positioning extremes like this are often seen as contrarian indicators that may be prone to reverse. With the more widely-followed 14-day RSI indicator forming a triple bullish divergence and rates testing strong previous support at the six-year lows near 1.2060, there are numerous indicators of at least a short-term bottom in USD/CAD:

Source: TradingView, StoneX

If the current low holds, the most immediate near-term target for bottom pickers will be previous-support-turned-resistance at 1.2250, followed by the 50-day EMA near 1.2320. Of course, to avoid getting a stinky finger, readers should consider setting stops on any counter-trend trade, with a break to new six-year lows below the 1.20 handle in this case opening the door for an accelerated selloff from here.

Learn more about forex trading opportunities.

How to trade with

Follow these easy steps to start trading with today:

  1. Open a account, or log-in if you’re already a customer.
  2. Search for the pair you want to trade in our award-winning platform.
  3. Choose your position and size, and your stop and limit levels.
  4. Place the trade.

Build your confidence risk free

More from FX

Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.