The Canadian dollar (aka “the loonie”) has enjoyed a remarkable run-up over the past 12 months, driven by skyrocketing oil and gold prices. (Canada’s got great big bunches of both hot commodities).
But Canada is also one of the U.S.’ biggest trading partners, and as such is not necessarily immune to the financial diseases afflicting our banks, economy and markets. As the contagion spreads across our northern border, you can expect the loonie to continue to peel away much, if all, of its 2007 gains.
When we look at chart for the Rydex CurrencyShares Canadian Dollar Trust (FXC), we see an obvious top in early November at $113.02. But the true sell signal -- a move below the 11-week moving average accompanied by a reversal in the Money Flow Oscillator -- only hit last week.
While a complete breakdown to 2006 levels is possible (but not yet highly probable), you can expect this ETF to drop as low as $94.52 over the next six to eight weeks, with an extension to $92.14 quite possible.
My recommendation: Purchase FXC March 100 Puts (FXC OV), currently available for $270 with a delta of 0.52. Should the FXC drop to $94.52, you would be looking at gains of 90%. A drop to FXC$83.11 would push those gains to 310%.
Adam Lass
Market Analyst, WaveStrength Options Weekly
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