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USD/CAD Rate Reverses Ahead of June Low as RSI Breaks Out

USD/CAD Rate Reverses Ahead of June Low as RSI Breaks Out

David Song, Strategist

Canadian Dollar Talking Points

USD/CAD appears to reversing course following the failed attempt to test the June low (1.3315) as the Relative Strength Index (RSI) breaks out of the downward trend established in July.

USD/CAD Rate Reverses Ahead of June Low as RSI Breaks Out

USD/CAD seems to be stuck in a narrow range following the limited reaction to US Gross Domestic Product (GDP) report, and the exchange rate may continue to track sideways ahead of the Non-Farm Payrolls (NFP) report as the decline from the July high (1.3646) fails to trigger an extreme reading in the RSI like the behavior seen in June.

Nevertheless, current market conditions may continue to benefit the Canadian Dollar as the crowding behavior in the Greenback carries into August, and the IG Client Sentiment Report may continue to reflect a net-long US Dollar bias even though the DXY index plummets for sixth consecutive weeks.

Image of IG Client Sentiment for USD/CAD rate

Retail traders have been net-long USD/CAD since mid-May, with the ratio of traders long to short currently standing at 2.06 to 1 as 67.34% of traders are net-long the pair. The latest update shows the number of traders net-long is 17.96% higher than yesterday and 0.45% higher from last week, while the number of traders net-short is 23.11% higher than yesterday and 15.58% lower from last week.

The rise in net-long interest takes shape as USD/CAD struggles to test the June low (1.3315), while the decline in net-short interest from the previous week could be attributed to profit-taking behavior as the exchange rate bounces back from the July low (1.3330). At the same time, the recent jump in net-short interest suggests FX traders are preparing for range bound conditions ahead of the NFP report as USD/CAD appears to be stuck in a narrow range.

With that said, it remains to be seen if fresh data prints coming out of the US and Canada will influence USD/CAD as the exchange rate trades within the June range, and the Relative Strength Index (RSI) may show the bearish momentum abating as it bounces back ahead of oversold territory and breaks out of the downward trend established in July.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the USD/CAD correction from the 2020 high (1.4667) managed to fill the price gap from March, with the decline in the exchange rate pushing the Relative Strength Index (RSI) into oversold territory for the first time since the start of the year.
  • Nevertheless, USD/CAD reversed from the March low (1.3315) in June, with both price and the RSI carving an upward trend during the month, but the bullish formations have been largely negated as the exchange rate snapped the range bound price action during the first half of July.
  • In turn, USD/CAD appeared to be on track to test the March/June low (1.3315) as the RSI established a downward trend in July, but the exchange rate appears to be reversing course ahead of the Fibonacci overlap around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement) as the oscillator flops ahead of oversold territory and breaks out of the bearish formation.
  • As a result, the March/June low (1.3315) may continue to act as support for USD/CAD, but need a break/close above the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) to open up the overlap around 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.