Canada + Crude = Dollar Bottom?

Picking tops and bottoms has always been a risky way to trade…it’s a low percentage loser’s game. But that never stops traders from trying to do exactly that time and time again! There is currently a lot of talk of a bottom in the U.S. Dollar and for that we can look to three charts: the U.S. Dollar Index, the USD/CAD, and crude oil.

The relationship between the dollar and crude is established and should come to no surprise to traders of these two markets.


The inverse relationship can clearly be seen here on the chart above. Finding the correlation between the U.S. Dollar and the USD/CAD take a little deeper look.


Here’s where it gets interesting. The dollar-canada spot rate (in color) actually started its upturn before the dollar (in black & white) did.

The Canadian Dollar has been the strongest currency over the past few months as it’s rise versus the U.S. Dollar can been seen on the chart as the trend on the chart has been steadily lower all of 2007.

If the U.S. Dollar will indeed make it’s turnaround now, it will likely be the USD/CAD chart that will signal the shift. Add to that the pullback on the crude oil chart, the Canadian Dollar has just a little more reason to lose ground versus the heavily shorted U.S. Dollar.

Before getting too carried away with a single up day on the Dollar Index though, consider that the dollar has had bounces that were shorted and currently the Dollar Index has fallen back below the 76.00 psychological level. The main distinction with the most recent dollar bounce is the Canadian Dollar weakness. It’s long way from a bounce to a reversal but it all starts with these kinds of small signals and shifts in correlated markets.

All charts used with permission from EZ2Trade Software.