Canadian Dollar Talking Points
USD/CAD extends the advance following the Bank of Canada (BoC) interest rate decision to trade above the 200-Day SMA (1.2626) for the first time in a year, with recent developments in the Relative Strength Index (RSI) indicating a further appreciation in the exchange rate as the oscillator climbs above 70 to push into overbought territory.
USD/CAD Rally Sends RSI Into Overbought Zone for Second Time in 2021
USD/CAD climbs to a fresh monthly high (1.2808) amid headlines that the Biden administration is considering changes to the United States-Mexico-Canada Agreement (USMCA), and fresh data prints coming out of the Canada may keep the exchange rate afloat as household spending is expected to contract for the second month.
![Image of DailyFX economic calendar for Canada](https://a.c-dn.net/b/1n0rI3/USDCAD-Rally-Sends-RSI-Into-Overbought-Zone-for-Second-Time-in-2021_body_CanadaEconomicCalendar07192021.png)
Canada Retail Sales are projects to fall 3.0% in May after declining 5.7% the month prior, and a dismal development may produce headwinds for the Canadian Dollar as it limits the BoC’s scope to wind down its emergency measures. In turn, the BoC may revert to a wait-and-see approach as “the Bank now expects GDP growth of around 6 percent in 2021 – a little slower than was expected in April,” and Governor Tiff Macklem and Co. may merely attempt to buy time at the next interest rate decision on September 8 as “decisions regarding further adjustments to the pace of net bond purchases will be guided by Governing Council's ongoing assessment of the strength and durability of the recovery.”
Until then, USD/CAD may continue to retrace the decline from the January high (1.2881) as it trades above the 200-Day SMA (1.2626) for the first time in a year, with the weakness in the Canadian Dollar spurring a shift in retail sentiment as traders flip net-short for the first time in 2021.
![Image of IG Client Sentiment for USD/CAD rate](https://a.c-dn.net/b/2AQ9cN/USDCAD-Rally-Sends-RSI-Into-Overbought-Zone-for-Second-Time-in-2021_body_USDCADSentiment07192021.png)
The IG Client Sentiment report shows 48.71% of traders are currently net-long USD/CAD, with the ratio of traders short to long standing at 1.05 to 1.
The number of traders net-long is 11.03% lower than yesterday and 33.15% lower from last week, while the number of traders net-short is 3.58% higher than yesterday and 41.56% higher from last week. The sharp decline in net-long position could be a function of profit-taking behavior as USD/CAD climbs to a fresh monthly high (1.2808), while the jump in net-short interest has fueled the shift in retail sentiment as 66.79% of traders were net-long the pair at the start of last week.
With that said, the rebound from the yearly low (1.2007) may turn out to be a change in the broader trend amid the shift in retail sentiment, and the overbought reading in the RSI is likely to be accompanied by a further advance in USD/CAD like the behavior seen during the previous month.
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USD/CAD Rate Daily Chart
![Image of USD/CAD rate daily chart](https://a.c-dn.net/b/0xsNxc/USDCAD-Rally-Sends-RSI-Into-Overbought-Zone-for-Second-Time-in-2021_body_USDCADDailyChart07192021.png)
Source: Trading View
- The negative slope in the 200-Day SMA (1.2625) indicates a bearish outlook for USD/CAD, but the rebound from the yearly low (1.2007) may turn out to be a change in the broader trend as it trades above the moving average for the first time since July 2020.
- Recent developments in the Relative Strength Index (RSI) indicate a similar dynamic as the oscillator pushes into overbought territory for the second time in 2021, with the move above 70 likely to be accompanied by a further advance in USD/CAD like the behavior seen during the previous month.
- In turn, USD/CAD appears to be on track to test the January high (1.2881), but need a close above the 1.2770 (38.2% expansion) region to bring the Fibonacci overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) on the radar.
- Next area of interest comes in around 1.2980 (61.8% retracement) followed by the 1.3030 (50% expansion) to 1.3040 (50% expansion) region.
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--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong