Canadian Dollar Talking Points
USD/CAD trades in a narrow range as the advance from the previous week sputters ahead of the monthly high (1.3341), but fresh developments coming out of the US may influence the exchange rate as Congress prepares to vote on another round of fiscal stimulus.
USD/CAD Rebound Sputters Ahead of Looming Vote on US Fiscal Stimulus
USD/CADstruggles to retain the advance from the monthly low (1.3099) even though the Relative Strength Index (RSI) breaks out of a downward trend, and the exchange rate may continue to track the opening range for October as US lawmakers struggle to meet on common ground.
Drew Hammill, the Deputy Chief of Staff for House Speaker Nancy Pelosi, tweets that “the Speaker continues to hope that, by the end of the day Tuesday, we will have clarity on whether we will be able to pass a bill before the election,” and the developments may sway investor confidence as the deadlock in Congress raises the threat for a protracted recovery.
As a result, swings in risk appetite may continue to shape the near-term outlook for the US Dollar as the Federal Reserve relies on its unconventional tools to support the US economy, and key market trends may persist over the remainder of the month as the Federal Open Market Committee (FOMC) vows to “increase its holdings of Treasury securities and agency MBS (mortgage-backed securities) at least at the current pace.”
However, Atlanta Fed President Raphael Bostic, who votes on the FOMC in 2021, warns that “if we assume that jobs continue to be added at the pace seen in the September labor report, it will take an additional 16 months to return to February employment levels,” and goes onto say that “widespread permanent job loss could become a material risk to the recovery” while speaking at the annual meeting of the Securities Industry and Financial Markets Association.
In turn, Bostic argues that “fiscal policymakers clearly have a significant role to play in ensuring that the economic disruptions don't become deeply rooted,” and it seems as though the Fed is in no rush to deploy more non-standard measures as Bostic insists that he’s “comfortable with our current policy stance.”
The comments suggest the FOMC will stick to the sidelines at the next interest rate decision on November 5 as the central bank prepares to unveil a “more explicit outcome-based forward guidance,” and the US Dollar may continue to show an inverse relationship with investor confidence as the Fed’s balance sheet increases for the second week to approach the peak from June.
At the same time, the crowding behavior in USD/CAD looks poised to persist as retail traders have been net-long the pair since mid-May, with the IG Client Sentiment report showing 67.75% of traders are net-long the pair, with the ratio of traders long to short standing at 2.10 to 1.
The number of traders net-long is 14.40% higher than yesterday and 20.12% lower from last week, while the number of traders net-short is 26.05% higher than yesterday and 0.60% lower from last week. The recent rise in both net-long and net-short interest has done little to alleviate the tilt in retail sentiment as 67.67% of traders were net-long USD/CAD last week, and key market trends resulting from the COVID-19 pandemic may carry into November as Chairman Jerome Powell and Co. remain “committed to using the Federal Reserve's full range of tools in order to support the U.S. economy.”
With that said, swings in risk appetite may sway USD/CAD, but recent price action warns of range bound conditions as the advance following the bullish outside day (engulfing) candle formation fails to spur a test of the monthly high (1.3341) even though the Relative Strength Index (RSI) breaks out of a downward trend.
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.
- 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 led to 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.
- In turn, the advance from the September low (1.2994) pushed USD/CAD above the 50-Day SMA (1.3204) for the first time since May, but the exchange rate appears to have reversed coursed following the failed attempt to test the August high (1.3451), which largely lines up with the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region.
- Nevertheless, a bullish outside day (engulfing) candle formation emerged following the failed attempt to close below the 1.3110 (50% expansion) region, and recent price action warns of range bound conditions as the rebound from the monthly low (1.3099 fails to spur a test of the monthly high (1.3341).
- As a result, USD/CAD may continue to track the opening range for October even though the RSI breaks out of a downward trend, with a close above the 1.3250 (23.6% expansion) area bringing the Fibonacci overlap around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement) on the radar.
- At the same time, need a close below 1.3110 (50% expansion) to open up the 1.3030 (50% expansion) to 1.3040 (61.8% expansion) area, with the next region of interest coming in around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement).
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
