Canadian Dollar Talking Points
USD/CAD appears to have reversed ahead of the July low (1.2303) as it snaps the series of lower highs and lows from the previous week, but fresh data prints coming out of Canada may curb the recent rebound in the exchange rate as the headline reading for inflation is expected to pick up for the third consecutive month.
USD/CAD Rate Rebound Vulnerable to Another Rise in Canada CPI
USD/CAD halts a five day decline as it extends the rebound from the monthly low (1.2337), and recent developments in the Relative Strength Index (RSI) raises the scope for a larger recovery in the exchange rate as the oscillator bounces back from 30.
Failure to push into oversold territory indicates that the bearish momentum is abating as the RSI starts to establish a positive slope, but the update to Canada’s Consumer Price Index (CPI) may generate a bearish reaction in USD/CAD as the headline reading for inflation is expected to increase to 4.3% from 4.1% per annum in September, which would mark the highest reading since 2003.
Signs of stronger inflation may put pressure on the Bank of Canada (BoC) to scale back monetary support as the most recent Employment report shows the labor market returning to pre-pandemic conditions, and the central bank may lay out a tentative exit strategy at its next interest rate decision on October 27 as Governor Tiff Macklem and Co. are slated to update the quarterly Monetary Policy Report (MPR).
Until then, USD/CAD may stage a larger rebound as it appears to be reversing course ahead of the July low (1.2303), but the extreme reading in retail sentiment looks poised to persist even as the exchange rate snaps the series of lower highs and lows from last week.
The IG Client Sentiment report shows 76.82% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 3.31 to 1.
The number of traders net-long is 9.52% higher than yesterday and 5.02% higher from last week, while the number of traders net-short is 5.33% higher than yesterday and 8.14% lower from last week. The rise in net-long position comes as USD/CAD extends the rebound from the monthly low (1.2337), while the decline in net-short interest has helped to fuel the crowding behavior as 74.35% of traders were net-long the pair last week.
With that said, it remains to be seen if a larger recovery in USD/CAD will alleviate the tilt in retail sentiment like the behavior seen earlier this year, but a further pick up in Canada inflation may drag on the exchange rate as it puts pressure on the BoC to alter the course for monetary policy.
USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, USD/CAD cleared the January high (1.2881) as an inverse head-and-shoulders formation took shape, with the development indicating a shift in the broader trend as the 50-Day SMA (1.2611) established a positive slope.
- However, the moving average has negated the upward trend as USD/CAD failed to take out the August high (1.2949) during the previous month, with the exchange rate extending the decline from of October amid the lack of momentum to defend the August low (1.2453).
- Nevertheless, USD/CAD appears to be reversing course ahead of the July low (1.2303) as it snaps the series of lower highs and lows from the previous week, and recent developments in the Relative Strength Index (RSI) raises the scope for a larger recovery in the exchange rate as the oscillator bounces back from 30.
- In turn, the bearish momentum may continue to abate as the RSI starts to establish a positive slope, but need a break/close above the Fibonacci overlap around 1.2410 (23.6% expansion) to 1.2440 (23.6% expansion) to open up the 1.2510 (78.6% retracement) region, which largely lines up with the 200-Day SMA (1.2502), with a move above the 50-Day SMA (1.2610) bringing the 1.2620 (50% retracement) to 1.2650 (78.6% expansion) area on the radar.
- However, a break of the July low (1.2303) opens up the 1.2140 (50% expansion) area, with the next region of interest coming in around 1.2020 (61.8% expansion).
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
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