USD/CAD Rate Trades in Defined Range Ahead BoC Interest Rate Decision

Canadian Dollar Talking Points

USD/CAD trades in a narrow range following the limited reaction to Canada’s Employment report, and the exchange rate may continue to consolidate ahead of the Bank of Canada (BoC) interest rate decision on September 9 as the Relative Strength Index (RSI) bounces back from oversold territory.

USD/CAD Rate Trades in Defined Range Ahead BoC Interest Rate Decision

USD/CAD appears to have reversed course ahead of the January low (1.2957) as Canada’s Employment report shows a slowdown in job growth, with the economy adding 245.8K jobs in August versus forecasts for a 250.0K print, which compares to the 418.5K expansion the month prior.

It remains to be seen if the fresh data prints will sway the Bank of Canada (BoC) as the rise in full-time position (205.8K) starts to outpace improvement in part-time employment (40.0K), and the central bank may merely attempt to buy time in September after delivering the updated Monetary Policy Report (MPR) in July.

In doing so, the BoC may show little intentions of altering the path for monetary policy as the “Bank expects the economy’s recuperation to slow,” and the central bank may continue to carry out “its large-scale asset purchase program at a pace of at least $5 billion per week” as Governor Tiff Macklem pledges to support the Canadian economy throughout the recovery.

More of the same from the BoC may keep current market trends in place as the Federal Reserve seems to be in no rush to scale back its emergency measures, and the crowding behavior in the US Dollar may also persist even though a bear-flag formation emerges in the DXY index.

The IG Client Sentiment report shows the retail crowd has been net-long USD/CAD since mid-May, with 72.36% of traders still net-long the pair as the ratio of traders long to short stands at 2.62 to 1. The number of traders net-long is 0.15% higher than yesterday and 7.53% higher from last week, while the number of traders net-short is 29.89% lower than yesterday and 1.57% lower from last week.

The decline in net-short position could be indicative of profit-taking behavior as the decline from the August high (1.3451) sputters ahead of the January low (1.2957), while the rise in net-long interest suggests the crowding behavior will

With that said, the rebound from the monthly low (1.2994) may prove to be an minor correction rather than a change in USD/CAD behavior as key market trends look poised to persist in September, but the exchange rate may continue to consolidate ahead of the BoC meeting as the Relative Strength Index (RSI) bounces back from oversold territory.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the USD/CAD correction from the 2020 high (1.4667) managed to fill the price gap from March, with the decline in the exchange rate pushing the Relative Strength Index (RSI) into oversold territory for the first time since the start of the year.
  • Nevertheless, USD/CAD reversed from the March low (1.3315) in June, with both price and the RSI carving an upward trend during the month, but the bullish formations have been largely negated as the exchange rate snapped the range bound price action during the first half of July.
  • USD/CAD managed to track the June range throughout July as the RSI broke out of a downward trend, but the failed attempt to push back above the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region has spurred a break of the March/June low (1.3315) even though the momentum indicator failed to push into oversold territory.
  • The decline from the August high (1.3451) briefly pushed the RSI below 30, but the lack of momentum to reflect the extreme reading seen in June may produce range bound conditions in USD/CAD as the indicator quickly climbs back above from oversold territory.
  • USD/CAD appears to have reversed course ahead January low (1.2957) following the string of failed attempts close below the Fibonacci overlap around 1.3030 (50% expansion) to 1.3040 (61.8% expansion), with a move above 1.3110 (50% expansion) likely to push the exchange rate towards 1.3170 (38.2% expansion).
  • Need a close below the overlap around 1.3030 (50% expansion) to 1.3040 (61.8% expansion) to bring the 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement) region back on the radar, which lines up with the January low (1.2957), with the next area of interest coming in around 1.2830 (38.2% retracement).

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— Written by David Song, Currency Strategist

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