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USD/CAD Susceptible to Larger Correction as RSI Divergence Persists

USD/CAD Susceptible to Larger Correction as RSI Divergence Persists

David Song, Strategist

Canadian Dollar Talking Points

USD/CAD extends the advance from the January low (1.2590) as the Federal Reserve’s first interest rate decision for 2021 fails to bolster investor confidence, and the exchange rate may stage a larger correction over the remainder of the month as the Relative Strength Index (RSI) continues to diverge with price and tracks the upward established earlier this year.

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USD/CAD Susceptible to Larger Correction as RSI Divergence Persists

USD/CAD trades to a fresh monthly high (1.2881) as the Federal Open Market Committee (FOMC) insists that “fiscal policy will help households and businesses weather the downturn as well as limit lasting damage to the economy that could otherwise impede the recovery,” and it seems as though the central bank is in no rush to deploy more unconventional tools even though “the pace of the recovery has moderated in recent months.”

The FOMC appears to be on track to retain the current course for monetary policy as the committee argues that “the recently enacted Coronavirus Response and Relief Act will provide additional support,” and it remains to be seen if Chairman Jerome Powell and Co. will adjust the forward guidance over the coming months as the central bank remains “committed to using our full range of tools to support the economy.”

In turn, a further deterioration in risk appetite may keep USD/CAD afloat as the US Dollar still reflects an inverse relationship with investor confidence, but the tilt in retail sentiment looks poised to persist following the FOMC rate decision as traders have been net-long the pair since May 2020.

Image of IG Client Sentiment for USD/CAD rate

The IG Client Sentiment report shows 54.12% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.18 to 1. The number of traders net-long is 22.39% lower than yesterday and 39.21% lower from last week, while the number of traders net-short is 0.76% lower than yesterday and 63.44% higher from last week.

The decline in net-long position comes as USD/CAD trades to a fresh monthly high (1.2881), while the surge in net-short interest has helped to alleviate the tilt in retail sentiment as 58.66% of traders were net-long the pair earlier this week.

It looks as though key market themes will remain in place as the FOMC stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month,” and the swings in risk appetite may continue to sway USD/CAD as major central banks rely on their non-standard tools to achieve their policy targets.

With that said, USD/CAD may stage a larger correction over the remainder of the month as the FOMC rate decision fails to bolster investor confidence, and the Relative Strength Index (RSI) may continue to diverge with price as it tracks the upward trend established earlier this year.

USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, USD/CAD cleared the January 2020 low (1.2957) following the US election, with the exchange rate trading to fresh yearly lows in November and December as the Relative Strength Index (RSI) established a downward trend during the same period.
  • USD/CAD started off 2021 by taking out last year’s low (1.2688) even though the RSI broke out of the bearish formation, with lack of momentum to hold above the 1.2770 (38.2% expansion) region pushing the exchange rate briefly below the Fibonacci overlap around 1.2620 (50% retracement) to 1.2650 (78.6% expansion).
  • However, USD/CAD broke out of the opening range for January following the failed attempt to break/close below the 1.2620 (50% retracement) to 1.2650 (78.6% expansion) region, with the RSI diverging with price as it established an upward trend.
  • USD/CAD may stage a larger correction following the string of failed attempt to close below the Fibonacci overlap around 1.2620 (50% retracement) to 1.2650 (78.6% expansion) as it trades to fresh monthly highs, but need a close above the 1.2880 (61.8% expansion) region to bring the 1.2980 (61.8% retracement) area on the radar.
  • Next area of interest comes in around 1.3030 (50% expansion) to 1.3040 (50% expansion) followed by the 1.3200 (38.2% expansion) handle.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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