Canadian Dollar Talking Points
USD/CAD may trade in a defined range ahead of the update to Canada’s Employment report as it reverses ahead of the weekly low (1.2761), but the Relative Strength Index (RSI) continues to indicate a larger correction in the exchange rate as it still tracks the upward trend established earlier this year.
USD/CAD Rate Tracks Weekly Range Ahead of Canada Employment Report
USD/CAD appears to be stuck in a narrow range after testing the 50-Day SMA (1.2790) for the first time since November, and it remains to be seen if the rebound from the January low (1.2589) will turn out to be an exhaustion in the broader trend rather than a change in market behavior as key themes remain in place, and it remains to be seen if the recent shift in retail position will highlight a similar dynamic as the crowding behavior from 2020 resurfaces.
Looking ahead, Canada’s Employment may keep USD/CAD afloat as the economy is expected to shed 47.5K jobs in January after losing 52.7K jobs the month prior, while the unemployment rate is projected to increased to 8.9% from 8.8% in December. Signs of a protracted recovery may produce headwinds for the Canadian Dollar as it puts pressure on the Bank of Canada (BoC) to further support the economy, and the central bank may strike a dovish forward guidance at its next meeting on March 10 as Governor Tiff Macklem and Co. remain“committed to providing the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.”
Until then, key market themes may continue to sway USD/CAD as the US Dollar broadly reflects an inverse relationship with investor confidence, and it looks as though the tilt in retail sentiment will also persist as traders have been net-long the pair since May 2020.
The IG Client Sentiment report shows 70.86% of traders are still net-long USD/CAD, with the ratio of traders long to short standing at 2.43 to 1. The number of traders net-long is 16.99% higher than yesterday and 12.58% higher from last week, while the number of traders net-short is 15.60% lower than yesterday and 30.17% lower from last week.
The decline in net-short position could be a function of profit-taking behavior as USD/CADreverses ahead of the weekly low (1.2761), while the rise in net-long interest has fueled the crowding behavior carried over from last year as 52.12% of traders were net-long the pair last week.
With that said, it remains to be seen if the rebound from the January low (1.2589) will turn out to be an exhaustion in the broader trend rather than a change in USD/CAD behavior as key market themes remain in place, but the Relative Strength Index (RSI) continues to indicate a larger correction in the exchange rate as it still tracks the upward trend established earlier this year.
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 string of failed attempt to 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 appears to be stuck in a narrow range as it tests the 50-Day SMA (1.2790) for the first time since November, but lack of momentum to push below the 1.2770 (38.2% expansion) region may send the exchange rate towards the 1.2880 (61.8% expansion) area.
- Need a break/close above 1.2880 (61.8% expansion) to bring the 1.2980 (61.8% retracement) area on the radar, with the next region of interest coming 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
