Canadian Dollar Talking Points
USD/CAD approaches the yearly low (1.2928) ahead of Canada’s Gross Domestic Product (GDP) report, and the update may keep the exchange rate under pressure as the Canadian economy is expected to avoid a technical recession.
USD/CAD Rate Approaches 2020 Low Ahead of Canada GDP Report
USD/CAD gives back the rebound from earlier this month as it fails to retain the range bound price action from the previous week, and fresh data prints coming out of Canada may drag on the exchange rate as the growth rate is expected to increase 47.6% in the third quarter of 2020 after contracting 38.7% during the previous period.
A sharp rebound in economic activity may spark a bullish reaction in the Canadian Dollar as the Bank of Canada (BoC) adjusts its quantitative easing (QE) program ahead of 2021, with the central bank announcing that “total purchases will be gradually reduced to at least $4 billion a week” at its most recent in October.
However, BoC Governor Tiff Macklem insists that the policy shift is “increasing the stimulative impact of our QE program per dollar purchased, allowing us to reduce our total minimum weekly purchases to $4 billion, while still providing at least as much monetary stimulus,” with the central bank head going onto say that “the focus of our bond purchases has shifted squarely to providing the monetary stimulus required to support the recovery and get inflation back to its target” while testifying in front of the House of Commons Standing Committee on Finance.
As a result, Governor Macklem states that the “QE program will continue until the recovery is well underway,” and it seems as though the BoC will continue to endorse a dovish forward guidance at its last meeting for 2020 as “the economy has entered in the slower-growth recuperation phase.”
In turn, key market trends may continue to influence USD/CAD ahead of the BoC interest rate decision on December 9 as the US Dollar broadly reflects an inverse relationship with investor confidence, while the tilt in retail sentiment looks poised to persist throughout the remainder of the year as traders have been net-long the pair since mid-May.
The IG Client Sentiment report shows 71.89% of traders are still net-long USD/CAD, with the ratio of traders long to short standing at 2.56 to 1. The number of traders net-long is 0.50% higher than yesterday and 9.70% higher from last week, while the number of traders net-short is 31.93% higher than yesterday and 11.74% higher from last week.
The rise in net-short position comes as USD/CAD trades to a fresh monthly low (1.2931), while the rise in net-long position suggests the crowding behavior will persist over the coming days as 72.26% of traders were net-long the pair last week.
With that said, swings in risk appetite may influence USD/CADahead of Canada’s GDP report as US Dollar broadly reflects an inverse relationship with investor confidence, but the update may keep the exchange rate under pressure as a sharp rebound in economic activity undermines speculation for additional monetary support.
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) in November.
- The failed attempt to close below the 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement) pushed USD/CAD up against the 1.3170 (38.2% expansion) region, but the exchange rate struggles to retain the rebound from following the US election, with the pair approaching the yearly low (1.2928) as it snaps the range bound price action from the previous week.
- A close below the 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement) brings the 1.2830 (38.2% retracement) region on the radar, with the next area of interest coming in around 1.2770 (38.2% expansion).
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
