USD/CAD Rally at Risk of Near-Term Exhaustion as Momentum Struggles

2016-11-15 16:20:00

David Song, Strategist

Talking Points:

- USD/CAD Rally at Risk of Near-Term Exhaustion as RSI Struggles Ahead of Overbought Territory.

- GBP/USD Carves Bearish Formation Following Dismal U.K. CPI; BoE Continues to Endorse Wait-and-See Approach.

Currency	Last	High	Low	Daily Change (pip)	Daily Range (pip)
USD/CAD	1.3475	1.3560	1.3465	82	95

USD/CAD Daily

Chart - Created Using Trading View

Broader outlook for USD/CAD remains constructive especially as the Relative Strength Index (RSI) makes a more meaningful attempt to break out of the bearish formation carried over from May, but the lack of momentum to push into overbought territory raises the risk for a near-term pullback especially as the exchange rate approaches the former-support zone from earlier this year around 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion).
Beyond the recent recovery in crude oil prices, another uptick in Canada’s Consumer Price Index (CPI) may encourage the Bank of Canada (BoC) to soften its dovish tone and endorse a wait-and-see approach for the year ahead as Governor Stephen Poloz and Co. ‘expects total CPI inflation to be close to 2 per cent from early 2017 onwards;’ signs of heightening price pressures may boost the appeal of the loonie ahead of the BoC’s last 2016 interest-rate decision on December 7.
Need a break/close above 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion) to open up the next topside target around 1.3840 (61.8% retracement), but a move below 1.3460 (61.8% retracement) may spur a move back towards 1.3300 (61.8% expansion) to 1.3310 (38.2% retracement).

Currency	Last	High	Low	Daily Change (pip)	Daily Range (pip)
GBP/USD	1.2422	1.2529	1.2380	69	149

GBP/USD Daily

Chart - Created Using Trading View

GBP/USD may continue to give back the advance from earlier this month as it carves a near-term series of lower highs & lows, with the pair at risk of testing channel support following the failed attempt to push above the Fibonacci overlap around 1.2630 (38.2% expansion) to 1.2680 (50% retracement); a move back below 1.2360 (50% expansion) may continue to erode the relief rally in the pound-dollar, with the RSI in focus as the oscillator preserves the bearish formation carried over from May.
Despite the unexpected weakness in the U.K. Consumer Price Index (CPI), Bank of England (BoE) Governor Mark Carney may continue to change his tune as the central bank head warns ‘inflation is going up. A pass through of a 20% fall in sterling is going to come and will build towards the end of this year and into 2017; will keep a close eye on the Jobless Claims report as household earnings are projected to pick up for the second consecutive month in September.
A closing price below 1.2360 (50% expansion) may open up the next downside target around 1.2270 (23.6% retracement) followed by 1.2100 (61.8% expansion).

The DailyFX Speculative Sentiment Index (SSI) shows the FX crowd remains net-long since even after the British Pound ‘flash crash,’ with retail sentiment hitting a 2016-extreme of +5.97 during the previous month, while traders have been net-short USD/CAD since October 20.
GBP/USD SSI sits at +1.42 as 59% of traders are long, with short positions 100.8% higher from the previous day as open interest jumps 95.5% during the same period.
USD/CAD SSI sits at -2.51 as 28% of traders are long, with short positions 114.6% higher from the previous day, while open interest stands 101.4% higher during the same period.
Will keep a close eye on the near-term trends across the major currencies following the surge in retail interest.

Why and how do we use the SSI in trading? View our video and download the free indicator here