USD/CAD Struggles to Test November 2020 High Ahead of Canada CPI

Canadian Dollar Talking Points

USD/CAD snaps the series of higher highs and lows from last week as it quicky pulls back from a fresh yearly high (1.3344), but the update to Canada’s Consumer Price Index (CPI) may keep the exchange rate afloat as inflation is expected to slow for the second month.

USD/CAD Struggles to Test November 2020 High Ahead of Canada CPI

The recent rally in USD/CAD appears to be stalling as it struggles to test the November 2020 high (1.3371), with the Relative Strength Index (RSI) highlighting a similar dynamic as the advance in the exchange rate fails to push the oscillator into overbought territory.

However, another downtick in Canada’s CPI may prop up USD/CAD as the headline reading for inflation is expected to narrow to 7.3% in August from 7.6% per annum the month prior, and evidence of easing price pressures may sway the Bank of Canada (BoC) as the central bank gauges “how much higher interest rates need to go to return inflation to target.”

As a result, the BoC may continue to implement smaller rate hikes after front-loading the hiking-cycle in July, and it remains to be seen if Governor Tiff Macklem and Co. will adjust the forward guidance at the next meeting on October 26 as the central bank is slated to release the updated Monetary Policy Report (MPR).

Until then, USD/CAD may stage further attempts to test the November 2020 high (1.3371) as the Federal Reserve is widely expected to deliver another 75bp rate hike, but the rebound from the 50-Day SMA (1.2980) may continue to unravel as it snaps the exchange rate snaps the series of higher highs and lows from last week.

In turn, USD/CAD may face a correction as long as the RSI holds below 70, and a larger pullback in the exchange rate may continue to alleviate the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 32.91% of traders are currently net-long USD/CAD, with the ratio of traders short to long standing at 2.04 to 1.

The number of traders net-long is 12.20% higher than yesterday and 29.63% lower from last week, while the number of traders net-short is 3.75% higher than yesterday and 34.18% higher from last week. The decline in net-long position comes as USD/CAD pulls back from a fresh yearly high (1.3344), while the crowding behavior appears to be dissipating despite a rise in net-short interest has only 29.83% of traders were net-long the pair last week.

With that said, another rise in Canada’s CPI may keep USD/CAD afloat even though it snaps the series of higher highs and lows from last week, and the exchange rate may stage further attempts to test the November 2020 high (1.3371) as the Federal Open Market Committee (FOMC) moves toward a restrictive policy.

USD/CAD Rate Daily Chart

Source: Trading View

• USD/CAD appears to be reversing ahead of the November 2020 high (1.3371) after failing to close above the 1.3290 (61.8% expansion) to 1.3310 (50% retracement) region, and the exchange rate may fall back towards the 1.3200 (38.2% expansion) handle as it snaps the series of higher highs and lows from last week.
• Next area of interest comes in around 1.3030 (50% expansion) to 1.3040 (50% expansion), and USD/CAD may continue to give back the advance from the 50-Day SMA (1.2980) as the recent rally in the exchange rate fails to push the Relative Strength Index (RSI) into overbought territory.
• Nevertheless, USD/CAD may track the positive slope in the moving average as it trades to a fresh yearly highs in September, but need a close above the 1.3290 (61.8% expansion) to 1.3310 (50% retracement) region to bring the November 2020 high (1.3371) back on the radar.
• Next area of interest comes in around the 1.3400 (23.6% expansion) handle followed by the 1.3460 (61.8% retracement) region.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong