Canadian Dollar Talking Points
USD/CAD consolidatesas it quickly pulls back from a fresh monthly high (1.3419), but the August high (1.3451) remains on the radar as the Relative Strength Index (RSI) tracks the upward trend established in September and approaches overbought territory.
USD/CAD Outlook: August High Still on Radar as RSI Tracks Upward Trend
USD/CAD largely tracks the range bound price action from earlier this week, and an improvement in investor confidence may drag on the exchange rate as the US Dollar reflects an inverse relationship with risk appetite.
However, the move back above the former-support zone around the March/June low (1.3315) may keep USD/CAD afloat as the RSI approaches overbought territory, and the indicator may show the advance from the yearly low (1.2994) gathering pace if the oscillator breaks above 70 to reflect the extreme readings seen in March.
It remains to be seen if the shift in risk appetite will persist in October as the Federal Reserve’s balance sheet widens for the second week to reach its highest level since June, but it seems as though Chairman Jerome Powell and Co. will rely on its current tools to support the US economy even though the central bank plans to “achieve inflation that averages 2 percent over time.”
In turn, swings in investor confidence may influence USD/CAD as the Federal Open Market Committee (FOMC) appears to be on track to retain the current policy at the next interest rate decision on November 5, but the tilt in retail sentiment looks poised to persist as traders have been net-long the pair since mid-May.
The IG Client Sentiment report shows 55.62% of traders are still net-long USD/CAD, with the ratio of traders long to short at 1.25 to 1. The number of traders net-long is 3.85% lower than yesterday and 18.55% lower from last week, while the number of traders net-short is 0.45% lower than yesterday and 33.94% higher from last week.
The decline in net-long position along with the surge in net-short interest has helped to alleviate the crowding behavior in USD/CAD as 61.86% of traders were net-long last week, and the tilt in retail sentiment may continue to abate as there appears to be a broader shift in market behavior.
With that said, USD/CAD may continue to consolidate following the string of failed attempt to test the August high (1.3451), but the exchange rate may stage a larger recovery as long as the Relative Strength Index (RSI) continues to track the upward trend established in September.
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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 lacked the momentum to produce a test of the January low (1.2957) as the indicator failed to reflect the extreme reading in June, with the oscillator quickly recovering from oversold territory.
- As a result, the advance from the monthly low (1.2994) has pushed USD/CAD above 50-Day SMA (1.3249) for the first time since May, with the exchange rate trading back above the former-support zone around the March/June low (1.3315).
- The close above the Fibonacci overlap around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement) keeps the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region on the radar as it lines up with the August high (1.3451), and the exchange rate may stage a larger recovery as long as the RSI continues to track the upward trend established in September.
- Will keep a close eye on the RSI as it approaches overbought territory, with a move above 70 likely to be accompanied by a further appreciation in USD/CAD like the behavior seen in March.
- The next area of interest coming in around 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement) followed by the 1.3580 (50% expansion) region.
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
