Canadian Dollar Talking Points
USD/CAD trades to a fresh monthly high (1.3390) as the US Dollar appreciates on the back of waning risk appetite, and key market trends may continue to influence the exchange rate in November as the reserve currency reflects an inverse relationship with investor confidence.
USD/CAD Eyes September High Following Break of Monthly Opening Range
USD/CAD approaches the September high (1.3421) as it breaks out of the monthly opening range, with the exchange rate largely unfazed by the US Gross Domestic Product (GDP) report despite the better-than-expected results.
The advance reading showed the growth rate rebounding a record 33.1% per annum in the third-quarter of 2020 after contracting 31.4% during the previous period, while the update for Weekly Jobless Claims crossed the wires at 751K versus forecasts for a 775K print for the week ending October 24.
It remains to be seen if the positive data prints will sway the Federal Reserve as US lawmakers struggle to deliver another fiscal stimulus package, and the central bank may come under increased pressure to further support the economy even though the Fed’s balance sheet climbs to a fresh record high.
Source: FOMC
The Fed’s balance sheet climbed to $7.177 trillion from $7.151 trillion in the week of October 12 to clear the peak from June, and it remains to be seen if the Federal Open Market Committee (FOMC) will adjust the forward guidance at the next interest rate on November 5 as Chairman Jerome Powell and Co. vow it “increase its holdings of Treasury securities and agency MBS (mortgage-backed securities) at least at the current pace.”
Until then, swings in investor confidence may continue to influence USD/CAD as the FOMC relies on its current tools to support the US economy, and the tilt in retail sentiment also looks poised to persist over the coming month as traders have been net-long the pair since mid-May.
The IG Client Sentiment report shows 54.87% of traders are net-long with the ratio of traders long to short at 1.22 to 1. The number of traders net-long is 24.12% lower than yesterday and 24.65% lower from last week, while the number of traders net-short is 38.63% higher than yesterday and 21.58% higher from last week.
The rise in net-short interest along with the decline in net-long position had helped to alleviate the crowding behavior in USD/CAD as 67.75% of traders were net-long the pair last week, but the Greenback may continue to show an inverse relationship with investor confidence as the tilt in retail sentiment remains in place.
With that said, swings in risk appetite may sway USD/CAD ahead of the next Fed rate decision, and the exchange rate may attempt to test the September high (1.3421) as it breaks out of the monthly opening range.
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 (1.3202) 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, with the exchange rate breaking out of the monthly opening range closing above the Fibonacci overlap around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement).
- The September high (1.3421) sits on the radar as it larger lines up with the former-support zone around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement), with a topside break opening up the 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement) area.
- Will keep a close eye on the RSI as it approaches overbought territory after breaking out of the downward trend established earlier this month, with a move above 70 likely to be accompanied by a further appreciation in USD/CAD like the behavior seen in March.
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
