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I previously discussed potential reversal setups in AUD/USD and USD/CAD, suggesting that RSI divergence was pointing to ebbing anti-USD momentum and paving the way for the greenback to recover. Both pairs have since made strides toward confirmation. AUD/USD now shows a bearish Dark Cloud Cover candlestick pattern while USD/CAD has put in an analogous bullish Piercing Line setup.

The two currency pairs are highly correlated to each other (-0.83 on rolling 20-day studies) and both have a strong relationship with the S&P 500 (0.86 for AUD/USD, -0.96 for USD/CAD). This suggests that taking up both positions would amount to doubling down on the same theme. I am not opposed to this in principle, but it seems more prudent to keep exposure modest at first to make sure the expected moves actually materialize and then add to the position.

Holding a long USD/CAD position implies a smaller negative rollover component vs. a short AUD/USD trade, allowing for a longer holding period in the event that the pair becomes mired in digestion mode ahead of next week's FOMC rate decision. With that in mind, I have now entered long at 1.3318. The trade initially targets the 14.6% Fibonacci expansion at 1.3499 and carries a stop-loss activated on a daily close below 1.3228. I will take profit on half of the position and move the stop to breakeven once the first objective is met.

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