Look to pair the strong currency against the weak one

USDCAD longs

Earlier this year I wrote an article on what I consider to be the number one thing to grasp in fx trading. See here. Today's post will be a reminder of the key concept of pairing a weak against a strong currency.

The weak: CAD

The oil market has been cornered by an unusual combination of falling demand due to COVID 19 and rising supply( due in part to Saudi and Russia falling out). Furthermore the storage facilities are fast reducing and longer term storage for oil is becoming more expensive as the demand for that storage grows. Even when countries start to lift COVID 19 restrictions the demand for oil will not immediately kick in due to the large build up in reserves. I am expecting CAD weakness over the next month.

The strong: USD

The USD on the other hand has been acting like a safe haven currency. Alongside the CHF and the JPY, when stocks have been falling, USD has been rising. Now, the unlimited QE by the FED should keep a lid on parabolic USD strength for now, but the USD will be bought again if we see another down leg in stocks. My view is that there is more downside to come as COVID19 implications become clear which would prompt USD buying.

Therefore, expect USDCAD buyers

Time frame

I expect this to play out over the course of the next 2-4 weeks.

The entry

Look to pair the strong currency against the weak one

What will change this outlook?

No-one knows the future, so what will change the outlook? Any return to major strength , say $25+ on US oil will invalidate this outlook. Also, any strong return to 'risk on' will cause USD to weaken.