Canadian Dollar Talking Points
USD/CAD approaches the weekly high (1.2457) as it retraces the decline following the Federal Reserve interest rate decision, and the exchange rate is likely to face increased volatility later this week as both the US and Canada are slated to releases updated figures surrounding the labor market.
USD/CAD Rate to Face US and Canada Employment Reports
USD/CAD appears to be on track to test the 200-Day SMA (1.2479) as it extends the advance from earlier this week, but lack of momentum to push above the moving average may generate range bound conditions in the exchange rate as the Federal Open Market Committee (FOMC) and Bank of Canada (BoC) carry out an outcome-based approach for monetary policy.
As a result, key data prints on tap for later this week may influence the near-term outlook for USD/CAD as Canada’s Employment report is anticipated to show a 50.0K expansion in October compared to the 157.1K print last month, while the US Non-Farm Payrolls (NFP) report is expected to increase 450K during the same period following the 194K rise in September.
A pickup in US employment may keep the FOMC on track to wind down “the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities,” but a slowdown in Canada job growth may push the BoC to the sidelines as the central bank pledges to keep “the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”
In turn, USD/CAD may attempt to retrace the decline from the October high (1.2739) as the Relative Strength Index (RSI) continues to recover from oversold territory, and a further advance in the exchange rate may help to alleviate the tilt in retail sentiment like the behavior seen earlier this year.
The IG Client Sentiment report shows 75.04% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 3.01 to 1.
The number of traders net-long is 0.39% lower than yesterday and 2.64% higher from last week, while the number of traders net-short is 13.40% lower than yesterday and 13.40% lower from last week. The crowding behavior appears to be moderating despite the rise in net-long interest as 75.81% of traders were net-long USD/CAD last week, while the decline in net-short position comes as the exchange rate approaches the weekly high (1.2457).
With that said, fresh data prints coming out of the US and Canada is likely to sway USD/CAD as both the Fed and BoC start to scale back monetary support, but the exchange rate may attempt to retrace the decline from the October high (1.2739) as the Relative Strength Index (RSI) continues to recover from oversold territory.
USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, USD/CAD cleared the January high (1.2881) in August as an inverse head-and-shoulders formation took shape, with the development indicating a shift in the broader trend as the 50-Day SMA (1.2546) 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), with the exchange rate taking out the July low (1.2303) in October as the Relative Strength Index (RSI) dipped below 30.
- Nevertheless, USD/CAD may continue to retrace the decline from the October high (1.2739) as the RSI recovers from oversold territory, 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.
- At the same time, the string of failed attempts to close above the overlap around 1.2410 (23.6% expansion) to 1.2440 (23.6% expansion) may generate range bound conditions, with a move below 1.2360 (100% expansion) brining the October low (1.2288) on the radar.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong