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Canadian Dollar: USD/CAD Weakness to Persist as RSI Snaps Upward Trend

Canadian Dollar: USD/CAD Weakness to Persist as RSI Snaps Upward Trend

David Song, Strategist

Canadian Dollar Talking Points

USD/CAD remains under pressure after snapping the opening range for February, and recent developments in the Relative Strength Index (RSI) indicate a further decline in the exchange rate as the oscillator fails to retain the upward trend from earlier this year.

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Canadian Dollar: USD/CAD Weakness to Persist as RSI Snaps Upward Trend

USD/CAD trades to a fresh monthly low (1.2661) following the failed attempt to test the January high (1.2881), and the rebound from the yearly low (1.2589) appears to have been a correction in the broader trend rather than a change in behavior as key market themes remain in place.

It seems as though the US Dollar will continue to reflect an inverse relationship with investor confidence as the Federal Reserve relies on its non-standard tools to achieve its policy targets, and the central bank may utilize its balance sheet throughout 2021 as Chairman Jerome Powell warns that “we are still very far from a strong labor market.”

As a result, swings in risk appetite may continue to sway USD/CAD as the the Federal Open Market Committee (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 it seems as though the Bank of Canada (BoC) will follow a similar approach as Governor Tiff Macklem and Co. insist that “the Bank will continue its QE (quantitative easing) program until the recovery is well underway.”

In turn, USD/CAD may continue to track a bearish trend as the BoC acknowledges that “a broad-based decline in the US exchange rate combined with stronger commodity prices have led to a further appreciation of the Canadian dollar,” but the tilt in retail sentiment looks poised to persist 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 68.66% of traders are still net-long USD/CAD, with the ratio of traders long to short standing at 2.19 to 1.

The number of traders net-long is 4.84% higher than yesterday and 9.29% higher from last week, while the number of traders net-short is 5.07% higher than yesterday and 15.08% higher from last week. The rise in net-short position comes as USD/CAD trades to a fresh monthly low (1.2661), while the increase in net-long interest has spurred a further tilt in retail sentiment as 62.30% of traders were net-long the pair earlier this week.

With that said, the rebound from the January low (1.2589) appears to have been a correction in the broader trend rather than a change in behavior as key market themes remain in place, with recent developments in the Relative Strength Index (RSI) indicating a further decline in the exchange rate as the oscillator snaps the upward trend from earlier this year.

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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 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.
  • Nevertheless, the rebound from the January low (1.2589) appears to have been a correction in the broader trend rather than a change in USD/CAD behavior as the exchange rate trades below the 50-Day SMA (1.2759) after failing to test the January high (1.2881), with the RSI highlighting a similar dynamic as the oscillator snaps the upward trend from earlier this year.
  • A break/close below the Fibonacci overlap around 1.2620 (50% retracement) to 1.2650 (78.6% expansion) may generate fresh yearly lows in USD/CAD as it brings the 1.2510 (78.6% retracement) region on the radar, with the next area of interest coming in around 1.2440 (23.6% expansion).
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--- 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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