One of the biggest market drivers in recent years isn't what you'd expect...
Most would point to inflation or the Federal Reserve's actions. But in reality, a lot of the ups and downs happened due to huge swings in the U.S. dollar.
The dollar soared nearly 30% from mid-2021 to late 2022. And it has dropped 9% since then.
That kind of volatility isn't typical of the world's reserve currency. What's more, the dollar's wild ride helps explain some of the major swings we've seen in stocks, bonds, and commodities.
It also explains big moves in other currencies... including a massive sentiment reversal in the Canadian dollar.
The currency hasn't been this hated since 2017. And according to history, outperformance is likely in the months ahead.
Let me explain...
Canada's currency crashed as the U.S. dollar soared in 2021 and 2022. The Canadian dollar dropped 13% during that stretch. And it hasn't recovered.
That's surprising because the U.S. dollar has also fallen since... And in most cases, a falling greenback means other currencies should rise.
That hasn't worked out for the Canadian dollar this time. The currency hit even lower levels last month than it did in late 2022. And that poor performance has spooked traders.
We can see that by looking at the Commitment of Traders ("COT") report for the Canadian dollar. The COT shows us what futures traders are doing with their money. It's a useful contrarian tool when it hits extreme levels.
You see, when these folks are all bearish, it means a rally is likely. And the COT recently showed that futures traders haven't been this bearish on the Canadian dollar in six years. Take a look...
The lower the chart reading, the more bets that futures traders have placed against the Canadian dollar. This level is one of the lowest we've seen since 2007.
These folks all expect the decline to continue. But history shows that's not likely. Similar setups have happened three other times. And the Canadian dollar outperformed in a big way in the months that followed. Take a look...
Like most currencies, the Canadian dollar goes nowhere over long periods of time. Since 2007, it has fallen roughly half a percent over a typical six-month period. You can do much better buying after sentiment bottoms, though...
Similar instances led to 2.5% gains in three months and 3.8% gains in six months. Those aren't huge numbers on their own. But compared with the losses, they're strong moves in a typically slow-moving currency.
The Canadian dollar can go on major rallies, too. They tend to happen after sentiment hits wildly bearish levels... like it has today.
Most investors don't spend time thinking about currencies. But consider paying attention to the Canadian dollar today... It could be gearing up for a move higher in the months ahead.
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