USD/CAD Extends Rebound Following Bullish Outside Day Price Formation


Canadian Dollar Talking Points

USD/CAD extends the rebound from the monthly low (1.3099) after carving a bullish outside day (engulfing) candle formation earlier this week, and the exchange rate may continue to appreciate over the coming days as the Relative Strength Index (RSI) breaks out of a downward trend.

USD/CAD Extends Rebound Following Bullish Outside Day Price Formation

USD/CAD appears to be on track to test the monthly high (1.3341) as the US Dollar appreciates on the back of waning risk appetite, and the Greenback may continue to reflect an inverse relationship with investor confidence as the Federal Open Market Committee (FOMC) relies on its emergency tools to support the US economy.

It seems as though the Federal Reserve will retain the current path for monetary policy as San Francisco Fed President Mary Daly, who votes on the FOMC in 2021, insists that “policy is in a good place right now,” with the official going onto say that “the Fed is fully committed to using every tool in its tool kit” while speaking at an event hosted by the Wall Street Journal.

At the same time, Richmond Fed President Thomas Barkin, who also votes on the FOMC in 2021, states that “the Fed will aim to keep rates low until we see moderate overshoots of inflation” while speaking at the Economic Club of New York, and the comments suggest the Fed will continue to endorse a dovish forward guidance as the central bank plans to “achieve inflation that averages 2 percent over time.

However, the FOMC appears to be in no rush to deploy more unconventional tools as Cleveland Fed President Loretta Mester, a 2020 voting-member on the FOMC, states that the committee could “shift to longer-term Treasuries, as we did during the Great Recession,” and the wait-and-see approach may keep key market trends in place as the central bank prepares a “more explicit outcome-based forward guidance.”

In turn, the US Dollar may continue to reflect an inverse relationship with investor confidence ahead of the next FOMC interest rate decision on November 5, and the crowding behavior in USD/CAD also looks poised to persist over the remainder of the month as traders have been net-long the pair since mid-May.

The IG Client Sentiment report shows 67.67% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 2.09 to 1. The number of traders net-long is 34.37% lower than yesterday and 13.54% lower from last week, while the number of traders net-short is 6.34% higher than yesterday and 8.21% lower from last week.

The decline in net-short position could be a function of stop-loss orders getting triggered as USD/CAD extends the rebound from the monthly low (1.3099), while the drop in net-long interest has helped to alleviate the tilt in retail sentiment as 75.93% of traders were net-long the pair earlier this week.

Nevertheless, the crowding behavior in USD/CAD looks poised to persist even though the FOMC vows to “increase its holdings of Treasury securities and agency MBS (mortgage-backed securities) at least at the current pace, and current market trends may carry into the end of the month as the US Dollar reflects an inverse relationship with investor confidence.

With that said, swings in risk appetite may sway USD/CAD, but the exchange rate may attempt to test the monthly high (1.3341) as the Relative Strength Index (RSI) breaks out of a downward trend.

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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 (1.3210) 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.
  • Looking ahead, USD/CAD may trade within a more defined range as the decline from earlier this month failed to produce a close below the 1.3110 (50% expansion) region, and the exchange rate may attempt to test the October high (1.3341) as it extends the series of higher highs and lows from earlier this week.
  • At the same time, he Relative Strength Index (RSI) suggests the bearish momentum will continue to abate as the indicator breaks out of a downward trend, but need a close above the 1.3250 (23.6% expansion) to bring the Fibonacci overlap around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement) on the radar.

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— Written by David Song, Currency Strategist

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