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USD/CAD Reverses Ahead of 50-Day SMA to Eye Yearly High

USD/CAD Reverses Ahead of 50-Day SMA to Eye Yearly High

David Song, Strategist

Canadian Dollar Talking Points

USD/CAD trades to a fresh weekly high (1.3808) as it extends the advance following the Federal Reserve rate decision, and the exchange rate may attempt to retrace the decline from the yearly high (1.3978) as it reverses ahead of the 50-Day SMA (1.3248).

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USD/CAD Reverses Ahead of 50-Day SMA to Eye Yearly High

USD/CAD seems to be tracking the positive slope in the moving average as it extends the advance from earlier this week, and developments coming out of the US may continue to sway the exchange rate as the Non-Farm Payrolls (NFP) report is anticipated to show a further improvement in the labor market.

The US economy is anticipated to add 200K jobs in October following the 263K expansion the month prior, and a positive development may encourage the Federal Reserve to maintain its existing approach in combating inflation as Chairman Jerome Powell insists that “it is very premature” to pause the hiking-cycle.

As a result, speculation for another 75bp Fed rate hike may keep USD/CAD afloat as the Bank of Canada (BoC) “expects CPI inflation to ease as higher interest rates help rebalance demand and supply,” and the update to Canada’s Employment report may have a limited impact on the exchange rate as Governor Tiff Macklem and Co. show little interest in pursuing a restrictive policy.

Nevertheless, the update is anticipated to show Canada Employment increasing 5.0K in October after rising 21.1K the month prior, and the data print may push the BoC to implement another 50b rate hike at its next meeting on December 7 as “Governing Council expects that the policy interest rate will need to rise further.”

Until then, the Greenback may continue to outperform its Canadian counterpart as the Federal Open Market Committee (FOMC) retains a hawkish forward guidance, and a further advance in USD/CAD may fuel the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment (IGCS) report shows only 35.70% of traders are currently net-long USD/CAD, with the ratio of traders short to long standing at 1.80 to 1.

The number of traders net-long is 15.29% lower than yesterday and 27.32% lower from last week, while the number of traders net-short is 11.92% higher than yesterday and 18.56% higher from last week. The decline in net-long position comes as USD/CAD trades to a fresh weekly high (1.3808), while the rise in net-short interest has fueled the crowding behavior as 42.86% of traders were net-long the pair in mid-October.

With that said, developments coming out of the US may sway USD/CAD as the FOMC pursues a restrictive policy, and the exchange rate may attempt to retrace the decline from the yearly high (1.3978) as it reverses ahead of the 50-Day SMA (1.3248).

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USD/CAD Rate Daily Chart

Source: Trading View

  • USD/CAD seems to be tracking the positive slope in the 50-Day SMA (1.3483) as it reverses ahead of the moving average, with the sting of failed attempts to close below 1.3540 (23.6% retracement) pushing the exchange rate back above the 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion) region.
  • A close above the 1.3800 (161.8% expansion) handle raises the scope for a test of the yearly high (1.3978), with the next area of interest coming in around 1.4040 (23.6% retracement).
  • However, failure to close above the 1.3800 (161.8% expansion) handle may keep USD/CAD within the October range, with a move below the 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion) region bringing 1.3540 (23.6% retracement) back on the radar.

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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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