Canadian Dollar Talking Points

USD/CAD continues to give back the advance from the start of the year after taking out the March/June low (1.3315), and current market conditions may keep the exchange rate under pressure as the crowding behavior in the US Dollar looks poised to persist.

USD/CAD Eyes January Low Even Though Canada Finance Minister Resigns

USD/CAD trades to a fresh monthly low (1.3185) even though Canada Finance Minister Bill Morneau resigns and steps down as a member of parliament, and the exchange rate may continue to chip away at the advance from the January low (1.2957) as the macroeconomic environment drags on the US Dollar.

The DXY indexhas plummeted more than 8% off the April highs as the Federal Reserve relies on its asset purchases along with its lending facilities to support the US economy, and the Federal Open Market Committee (FOMC) Minutes may reinforce a dovish forward guidance for monetary policy as the central bank vow to “increase our holdings of Treasury and agency mortgage-backed securities at least at the current pace.

The Bank of Canada (BoC) appears to be on a similar path as Governor Tiff Macklem and Co. plan to carry out “its large-scale asset purchase program at a pace of at least $5 billion per week,” but the provisions to the US Dollar liquidity swap lines unveiled in March may continue to weigh on the Greenback as the arrangements “serve as an important liquidity backstop to ease strains in global funding markets.”

In turn, the crowding behavior in the US Dollar looks poised to persist even though the FOMC retains a dovish forward guidance for monetary policy as retail traders have been net-long USD/CAD since mid-May.

Image of IG Client Sentiment for USD/CAD rate

The IG Client Sentiment report shows 70.63% of traders are still net-long USD/CAD, with the ratio of traders long to short at 2.40 to 1. The number of traders net-long is 19.63% higher than yesterday and 20.65% higher from last week, while the number of traders net-short is 15.27% lower than yesterday and 26.68% lower from last week.

The decline in net-short position could be an indication of profit-taking behavior amid the break of the March/June low (1.3315), while the rise in net-long interest suggests the skew in USD/CAD retail sentiment will persist over the coming days even though the exchange rate trades to a fresh monthly low (1.3185).

With that said, current market conditions may keep USD/CAD under pressure, and the exchange rate may continue give back the advance from the January low (1.2957) as the crowding behavior in the US Dollar looks poised to persist.

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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 the previous month as the RSI broke out of the downward trend established in July, 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), with the indicator now approaching oversold territory.
  • Will keep a close eye on the RSI as it failed to push below 30 earlier this month, but a move into oversold territory is likely to be accompanied by a further decline in USD/CAD like the behavior seen in June.
  • Need a break/close below 1.3170 (50% expansion) to bring the 1.3110 (50% expansion) region on the radar, with the next area of interest coming in around 1.3030 (50% expansion) to 1.3040 (61.8% expansion).
  • It remains to be seen if USD/CAD work its way towards the Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement) as it lines up with the January low (1.2957).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong





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