USD/CAD Rate Vulnerable Following Failed Attempt to Test August High

Canadian Dollar Talking Points

USD/CAD appears to have reversed course following the failed attempt to test the August high (1.3451), and recent developments in the Relative Strength Index (RSI) cast a bearish outlook for the exchange rate as the indicator snaps the upward trend established in September.

USD/CAD Rate Vulnerable Following Failed Attempt to Test August High

USD/CAD extends the decline from the start of the month as the US Dollar depreciate against most of its major counterparts, and the exchange rate may continue to give back the rebound from the September low (1.2994) as weakness in the Greenback coincides with the recovery in global equity prices.

The outlook for monetary policy may continue to shore up risk appetite as the Federal Reserve plans to “achieve inflation that averages 2 percent over time, and the central bank may come under pressure to further insulate the economy asUS lawmakers struggle to agree on another fiscal stimulus package.

In turn, the FOMC may bring back ‘Operation Twist’ as Cleveland Fed President Loretta Mester, a 2020 voting-member on the Federal Open Market Committee (FOMC), states that the central bank could “shift to longer-term Treasuries, as we did during the Great Recession, if we needed more accommodation” during an interview with Bloomberg News.

The comments suggest the FOMC will continue to tweak its emergency measures to support the US economy as most Fed officials judged that “yield caps and targets would likely provide only modest benefits in the current environment, and it seems as though Chairman Jerome Powell and Co. are in no rush to deploy more non-standard tools as the Summary of Economic Projections (SEP) show the longer run interest rate forecast unchanged from the June meeting.

As a result, the FOMC Minutes may highlight more of the same for the next interest rate decision on November 5, and key market trends look poised to persist as the tilt in retail sentiment carries into October, with traders net-long USD/CAD since mid-May.

The IG Client Sentiment report shows 67.15% of traders are still net-long USD/CAD, with the ratio of traders long to short at 2.04 to 1. The number of traders net-long is 17.22% higher than yesterday and 30.63% higher from last week, while the number of traders net-short is 10.00% higher than yesterday and 15.97% lower from last week.

The decline in net-short position could be a function of profit-taking behavior as USD/CAD extends the decline from the start of the month, but the rise in net-long interest has spurred a further tilt in retail positioning as 55.62% of traders were net-long the pair last week.

With that said, the crowding behavior in USD/CAD looks poised to persist despite the failed attempt to test the August high (1.3451), and recent developments in the Relative Strength Index (RSI) cast a bearish outlook for the exchange rate as the indicator snaps the upward trend established in September.

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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.
  • 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 led to 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 lacked the momentum to produce a test of the January low (1.2957) as the indicator failed to reflect the extreme reading in June.
  • In turn, the advance from the September low (1.2994) pushed USD/CAD above the 50-Day SMA (1.3238) for the first time since May, but the exchange rate appears to have reversed coursed following the failed attempt to test the August high (1.3451), which largely lines up with the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region.
  • The RSI highlights a similar dynamic as the indicator flops ahead of oversold territory and snaps the upward trend established in September, with a break/close below 1.3250 (23.6% expansion) bringing the 1.3170 (50% expansion) region on the radar as the bullish momentum abates.
  • Next area of interest coming in around 1.3110 (50% expansion) followed by the Fibonacci overlap around 1.3030 (50% expansion) to 1.3040 (61.8% expansion).

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— Written by David Song, Currency Strategist

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