USD/CAD on Cusp of Testing Monthly High Ahead of Canada CPI Report

Canadian Dollar Talking Points

USD/CAD carves a series of higher highs and lows after snapping the monthly opening range for February, and fresh developments coming out of Canada may do little to derail the recent recovery in the exchange rate as inflation is expected to hold steady in January.

USD/CAD on Cusp of Testing Monthly High Ahead of Canada CPI Report

USD/CAD is on the cusp of testing the monthly high (1.2788) as the US Dollar appreciates against all of its major counterparts, and current market conditions may keep the exchange rate afloat as Russia-Ukraine tensions appear to be spurring a flight to safety.

The shift in risk appetite along with expectations for an imminent change in US monetary policy may push USD/CAD to fresh monthly highs as the ongoing rise in the Consumer Price Index (CPI) puts pressure on the Federal Reserve to normalize monetary policy sooner rather than later, and it remains to be seen if Chairman Jerome Powell and Co. will project a steeper path for the Fed Funds rate as the central bank is slated to released the updated Summary of Economic Projections (SEP) at its next interest rate decision on March 16.

In contrast, developments coming out of Canada may do little to influence USD/CAD as the headline reading for inflation is expected to print at 4.8% for the second month, and the Bank of Canada (BoC) may continue to outline a gradual path in normalizing monetary policy as “the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.”

In turn, swings in risk appetite may sway USD/CAD over the remainder of the month as the recent strength in the US Dollar coincides with the weakness in global equity prices, while the tilt in retail sentiment looks poised to persist as traders have been net-long the pair since late-December.

The IG Client Sentiment report shows 59.41% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.46 to 1.

The number of traders net-long is 10.91% higher than yesterday and 10.18% lower from last week, while the number of traders net-short is 22.75% higher than yesterday and 7.89% higher from last week. The decline in net-long interest comes as USD/CAD snapped the opening range for February during the previous week, while the rise in net-short position has helped to alleviate the crowing behavior as 67.15% of traders were net-long the pair last week.

With that said, the update to Canada’s CPI may generate a limited reaction as inflation is expected to hold steady, and the decline from the December high (1.2964) may turn out to be a correction in the broader trend if it manages to clear the opening range for 2022.

USD/CAD Rate Daily Chart

Source: Trading View

• Keep in mind, USD/CAD traded to a fresh 2021 high (1.2964) in December even as the Relative Strength Index (RSI) diverged with price, but the exchange rate appears to be stuck in a defined range amid the string of failed attempts to test the January high (1.2814).
• In turn, lack of momentum to close above the 1.2770 (38.2% expansion) region may keep USD/CAD within the January range, with a move below the 50-Day SMA (1.2702) bringing the 1.2620 (50% retracement) to 1.2650 (78.6% expansion) area back on the radar.
• Need a break/close below the 1.2620 (50% retracement) to 1.2650 (78.6% expansion) area to open up the 200-Day SMA (1.2526), with a move below the 1.2510 (78.6% retracement) raising the scope for a test of the January low (1.2450).
• Nevertheless, a close above the 1.2770 (38.2% expansion) region along with a break above the monthly high (1.2788) opens up the January high (1.2814), with a break/close above the Fibonacci overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) bringing the December high (1.2964) on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong