USD/CAD Rally Vulnerable amid Failure to Clear August Opening Range

Canadian Dollar Talking Points

USD/CAD appears to be on track to test the monthly high (1.2985) after testing the 200-Day SMA (1.2753), but the exchange rate may face range bound conditions over the coming days if it fails to clear the opening range for August.

USD/CAD Rally Vulnerable amid Failure to Clear August Opening Range

USD/CAD trades to a fresh weekly high (1.2967) as it retraces the decline following the Federal Open Market Committee (FOMC) Minutes, and the exchange rate may extends the advance from earlier this week as it appears to be tracking the positive slope in the moving average.

As a result, the decline from the yearly high (1.3224) may turn out to be a correction in the broader trend as Canada’s Consumer Price Index (CPI) narrows to 7.6% in July from 8.1% per annum the month prior, and evidence of slowing inflation may encourage the Bank of Canada (BoC) to gradually adjust the forward guidance for monetary policy as “the July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.”

At the same time, Governor Tiff Macklem and Co. may opt for smaller rate hikes over the coming months after deciding to “front-load the path to higher interest rates” in July, and the Canadian Dollar may face headwinds ahead of the next BoC meeting on September 7 as recent data prints coming out of the economy cast doubts for another 100bp rate hike.

Until then, USD/CAD may continue to retrace the decline from the yearly high (1.3224) if it manages to clear the opening range for August, while the recent flip in retail sentiment looks poised to persist as the exchange rate extends the advance from earlier this week.

The IG Client Sentiment report shows 46.51% of traders are currently net-long USD/CAD, with the ratio of traders short to long standing at 1.15 to 1.

The number of traders net-long is 15.78% lower than yesterday and 34.90% lower from last week, while the number of traders net-short is 0.25% higher than yesterday and 34.34% higher from last week. The sharp decline in net-long position comes as USD/CAD trades to a fresh weekly high (1.2967), while the jump in net-short interest has maintained the crowding behavior as 43.69% of traders were net-long the pair earlier this week.

With that said, USD/CAD may stage a larger advance over the coming days it appears to be on track to test the monthly high (1.2985), but the exchange rate may face range bound conditions if it fails to clear the opening range for August.

USD/CAD Rate Daily Chart

Source: Trading View

• USD/CAD appears to have reversed course after testing the 200-Day SMA (1.2753), with a break above the monthly high (1.2985) along with a close above the 1.2980 (618% retracement) region bringing the 1.3030 (50% expansion) to 1.3040 (50% expansion) area on the radar.
• Next area of interest comes in around the 1.3200 (38.2% expansion) handle, with a break above the yearly high (1.3224) opening up the 1.3290 (61.8% expansion) to 1.3310 (50% retracement) region.
• However, failure to clear the opening range for August may keep USD/CAD in a defined range, and lack of momentum to test the 1.2980 (618% retracement) region may push the exchange rate back towards the Fibonacci overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong