Undervalued Currency Set For Remarkable Comeback

In recent years, the market has been significantly influenced by an unexpected factor.

While many would attribute market fluctuations to inflation or the Federal Reserve’s actions, the reality is that the U.S. dollar has played a substantial role. The dollar experienced a nearly 30% surge from mid-2021 to late 2022, followed by a 9% drop. This level of volatility is unusual for the world’s reserve currency and has contributed to major swings in stocks, bonds, and commodities.

This volatility has also impacted other currencies, particularly the Canadian dollar, which has seen a significant sentiment reversal. The Canadian dollar hasn’t been this unpopular since 2017, and history suggests that it is likely to outperform in the coming months.

The Canadian dollar took a hit as the U.S. dollar soared in 2021 and 2022, dropping 13% during that period. Despite the subsequent fall of the U.S. dollar, the Canadian dollar has not recovered. This is unusual, as a falling U.S. dollar typically leads to a rise in other currencies.

The Commitment of Traders (COT) report for the Canadian dollar reveals that futures traders are bearish on the currency. This is a contrarian indicator that suggests a rally is likely. The report shows that futures traders haven’t been this bearish on the Canadian dollar in six years.

Historically, when futures traders are bearish, the Canadian dollar tends to outperform. This has happened three times before, with the Canadian dollar making significant gains in the months following each instance.

While the Canadian dollar generally remains stable over long periods, it has fallen about half a percent over a typical six-month period since 2007. However, buying after sentiment bottoms can lead to gains of 2.5% in three months and 3.8% in six months. These aren’t massive numbers, but they represent strong moves for a typically slow-moving currency.

The Canadian dollar can also experience major rallies, particularly after sentiment hits extremely bearish levels. Therefore, it may be worth paying attention to the Canadian dollar, as it could be preparing for a rise in the coming months.

In other news, the “Magnificent Seven” tech stocks have been leading the market this year. However, a signal now indicates that about 80% of stocks are breaking out to the upside. Historically, this broad shift could lead to outperformance.

September and October were challenging months for many investors due to a painful correction. However, stocks have surged since then, and similar downturns have historically proven to be excellent buying opportunities, not just for a few months, but for the coming year.

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