Canadian Dollar Talking Points
USD/CAD trades to a fresh monthly high (1.3258) ahead of the Bank of Canada (BoC) interest rate decision as there appears to be a shift in risk appetite, and the exchange rate appears to be on track to test the March/June low (1.3315) for resistance as it initiates a series of higher highs and lows.
USD/CAD Rate Rebound Brings March/June Low on Radar
USD/CAD breaks out of the range bound price action following Canada’s Employment report as global equity prices come under pressure, and a further shift in investor confidence may fuel a larger recovery in the US Dollar as the NASDAQ 100 and S&P500 sit at a precarious position.
Looking ahead, it remains to be seen if the BoC meeting will influence USD/CAD as the central bank is expected to retain the current policy, and Governor Tiff Macklem and Co. may stick to the same script in September after delivering the updated Monetary Policy Report (MPR) in July.
In turn, the BoC may continue to carry out “its large-scale asset purchase program at a pace of at least $5 billion per week” throughout the remainder of the year, and more of the same from the central bank may undermine the recent rebound in USD/CAD as the Federal Reserve plans to “achieve inflation that averages 2 percent over time.”
At the same time, the crowding behavior in the US Dollar looks poised to persist even though a bear-flag formation emerges in the DXY index, with the retail crowd net-long USD/CAD since mid-May.
The IG Client Sentiment report shows 68.62% of traders are still net-long USD/CAD, with the ratio of traders long to short standing at 2.19 to 1. The number of traders net-long is 9.03% lower than yesterday and 3.59% lower from last week, while the number of traders net-short is 16.19% lower than yesterday and 17.60% lower from last week.
The decline in net-short position could be result of stop-loss orders being triggered as USD/CAD trades to a fresh monthly high (1.3258) ahead of the BoC meeting, while the drop in net-long interest has helped to alleviate the tilt in retail sentiment as 72.36% of traders were net-long the pair earlier this week.
With that said, a further shift in risk appetite may spur a test of the March/June low (1.3315) for resistance as USD/CAD reverses ahead of the January low (1.2957), but the recent rebound in the exchange rate may prove to be an exhaustion in the bearish price action rather than a change in trend as key market themes persist.
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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.
- USD/CAD managed to track the June range throughout July as the RSI broke out of a downward trend, but the failed attempt to push back above the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region has spurred a break of the March/June low (1.3315) even though the momentum indicator failed to push into oversold territory.
- The decline from the August high (1.3451) briefly pushed the RSI below 30, but the lack of momentum to reflect the extreme reading seen in June has spurred a rebound in USD/CAD, with the indicator quickly recovering from oversold territory.
- As a result, USD/CAD appears to have reversed course ahead January low (1.2957) following the string of failed attempts close below the Fibonacci overlap around 1.3030 (50% expansion) to 1.3040 (61.8% expansion), with the move above the 1.3170 (38.2% expansion) region bringing the 1.3290 (61.8% expansion) 1.3320 (78.6% retracement) area on the radar, which lines up with the March/June low (1.3315).
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
