Canadian Dollar Talking Points
USD/CAD struggles to retain the rebound from late last week on the back of US Dollar weakness, and swings in risk appetite may continue to sway the exchange rate ahead of the Federal Open Market Committee (FOMC) Minutes on tap for November 25 as the Greenback broadly reflects an inverse relationship with investor confidence.
USD/CAD Rate Continues to Trade in Defined Range Ahead of FOMC Minutes
USD/CAD continues to trade within a defined range following the Group of 20 (G20) Summit as virtual meeting offered little information regarding the monetary policy outlook, and it remains to be seen if the FOMC Minutes will trigger a market reaction as the central bank appears to be on track to retain the current policy at its last meeting for 2020.
The Fed Minutes may largely reinforce a dovish forward guidance as Chairman Jerome Powell and Co. are “committed to using our full range of tools to support the economy,” but the threat of a protracted recovery may push the central bank to provide additional monetary stimulus as Dallas Fed President Robert Kaplan, a 2020-voting member on the FOMC, warns that the economic rebound is “decelerating” during an joint conference with the Kansas City Fed.
Kaplan goes onto say that “the last part of the fourth quarter, and certainly the first quarter, are going to be very challenging” as Fed officials prepare to update the Summary of Economic Projections (SEP), and the FOMC may offer a more detailed forward guidance at its next interest rate decision on December 16 as Treasury Secretary Steven Mnuchin lays out plans to wind down the emergency lending facilities.
However, the FOMC may rely on its current tools to support the US economy as Chairman Powell and Co. vow to “increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace,” and the US Dollar may continue to reflect an inverse relationship with investor confidence as key market trends look poised to persist throughout the remainder of year.
At the same time, the tilt in retail sentiment may also carry into the end of 2020 as retail traders have been net-long USD/CAD since mid-May, with the IG Client Sentiment report showing 72.26% of traders currently net-long the pair as the ratio of traders long to short stands at 2.60 to 1.
The number of traders net-long is 18.45% higher than yesterday and 13.31% higher from last week, while the number of traders net-short is 9.34% higher than yesterday and 28.50% lower from last week. The decline in net-short position comes as USD/CAD trades in a defined range, while the rise in net-long interest has spurred a greater tilt in retail sentiment as 70.91% of traders were net-long the pair last week.
With that said, key market trends may continue to influence USD/CADover the remainder of the month as the crowding behavior looks poised to persist, but exchange rate may continue to trade within a defined range ahead of the FOMC Minutes as market participation is likely to thin ahead of the Thanksgiving holiday in the US.
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 (1.3195) for the first time since May, but the exchange rate 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.
- A similar scenario took shape in October as USD/CAD tracked the September range, but the exchange rate cleared the January low (1.2957) following the US election to trade to a fresh 2020 low (1.2928).
- However, the failed attempt to close below the 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement) has pushed USD/CAD up against the 1.3170 (38.2% expansion), with the exchange rate trading a defined range going into the end of November as it continues to bounce back from the Fibonacci overlap around 1.3030 (50% expansion) to 1.3040 (61.8% expansion).
- Need a break/close below the Fibonacci overlap around 1.3030 (50% expansion) to 1.3040 (61.8% expansion) to bring the 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement) region back on the radar, with the next area of interest coming in around 1.2830 (38.2% retracement).
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
