USD/CAD, EUR/GBP Analysis and Talking Points
As equity markets extend losses, high beta currencies such as the Loonie remains on the backfoot. Additionally, the combination of a firmer USD has pushed USD/CAD towards levels not seen since the backend of 2020. That said, judging by US/CA rate differentials and oil prices, this suggests that the pair is slightly above fair value.
At the same time, the 1.30 handle will be a stumbling block for USD/CAD on its first test. However, unless equity markets stabilise, the path of least resistance is higher USD/CAD, which as shown below has been the biggest factor behind the recent CAD weakness.
USD/CAD vs US/CA 5Y Differentials and Brent Crude Oil
Source: Refinitiv
Source: Refinitiv
Hurdles Ahead for USD/CAD
On the technical side, while the 2021 high at 1.2963 is in focus, the key target for USD/CAD bulls will be the 1.3000 handle. This area I would expect to be a tough area to hold above, particularly on its first attempt and with the 200WMA within close proximity at 1.3040. As such, should we see a slight reprieve in equity markets, this would be a ideal area to fade recent gains.
A Helpful Guide to Support and Resistance Trading
Keep in mind, with the S&P 500 falling some 5% since Thursday, there is a good chance of a turnaround Tuesday, which could be the catalyst for a pullback in USD/CAD and as has been the case recently, market participants have attempted to front run this in the Monday afternoon session.
USD/CAD Chart: Daily Time Frame
Source: Refinitiv
| Change in | Longs | Shorts | OI |
| Daily | 2% | 3% | 2% |
| Weekly | 15% | -18% | -7% |
IG Client Sentiment Shifts Signal USD/CAD May Reverse Lower Soon
Data shows 49.81% of traders are net-long with the ratio of traders short to long at 1.01 to 1. The number of traders net-long is 12.92% higher than yesterday and 22.94% higher from last week, while the number of traders net-short is 3.11% lower than yesterday and 4.11% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/CAD prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse lower despite the fact traders remain net-short.
