CMEGroup Liquidity Continues to Return
Source: CMEGroup
As of mid-January, market participants have slowly returned to the futures markets from the holiday season at the CMEGroup exchange. Open interest (white line) has increased by approximately 10 million contracts. The cumulative daily volume has steadily increased as well. Markets need healthy liquidity for sustainable price trends in our markets.
Canadian Government Fiscal Year-End
The Canadian Government fiscal year runs from April 01 to March 31. The 4th quarter begins January 01 and closes on March 31. Central banks are crucial in shaping a country's monetary policy and currency management.
Some events Central banks engage in at the end of their fiscal year:
- Policy Statements: Central banks often issue policy statements or conduct press conferences at the end of fiscal years, guiding their future monetary policy. These communications can influence market expectations and impact currency values.
- Reserve Management: Central banks manage foreign exchange reserves, and adjustments in their reserve portfolios can affect currency values. Depending on their year-end needs, this could lead to repatriation or expenditures of their currency.
- Economic Forecast Reports: Central banks may release reports on the economic outlook for the upcoming year, which could provide insights into forthcoming policy decisions.
Technical Picture
Source: Barchart
Based on a daily nearby futures chart, the Canadian Dollar has been in a channel since approximately November 2022. Before this, the market broke through significant support, and that area now acts as a point of resistance. The Canadian Dollar has respected this general area since January 2018, as the market has traded on both sides of the support and resistance area.
Sideways or channeling markets tend to be more challenging to trade. However, this channel has a significant range from top to bottom that could allow a trader to find a short-term trend in which to participate.
The Commitment of Traders (COT) Report
Source: CMEGroup
The COT report illustrates an interesting pattern of the Leveraged Fund traders. The futures price (yellow line) from November 2022 to the current date on the far right shows the current channel. The vertical red lines are the number of gross short positions the Leveraged Fund traders hold. Notice that the Leveraged Funds' short positions increased for each futures price peak while in the channel. In July 2023, for two weeks, they added even more short positions as the price traded near the channel's peak. The recent price rally back to the top of the price channel in December 2023 showed the most significant short position held by the Leveraged Funds since 2017.
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
The December 2023 rally to the channel's top resulted in the Relative Strength Indicator (RSI) reaching an over-bought reading before the price reversed. The Canadian Dollar has a bearish posture, trading near the top of a multi-year channel, the largest Leveraged Fund short position since 2017, and over-bought RSI.
MRCI research has found that selling the March Canadian Dollar futures on approximately January 12 has closed lower on February 08 for 13 of the past 15 years, 87% of the time. The yellow box is MRCI's optimal window for finding bearish trade setups.
Four years did not suffer a closing daily drawdown during the past 15 years of selling during the optimal window.
In closing
The futures markets were used to reference this Canadian dollar trade. A trader could use the spot Forex market and trade the USDCAD. The only difference is the spot price moves in a direction opposite to the futures.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must also consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
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