USD/CAD Rate Rebound Undermined by Crowding Behavior in US Dollar


Canadian Dollar Talking Points

USD/CAD recovers after taking out the March low (1.3315) during the first week of August, but current market conditions may keep the exchange rate under pressure as the crowding behavior in the US Dollar persists.

USD/CAD Rate Rebound Undermined by Crowding Behavior in US Dollar

USD/CAD appears to making its way towards the monthly high (1.3451) following the limited reaction to Canada’s Employment report, and the rebound from the August low (1.3233) may gather pace as the Relative Strength Index (RSI) reverses course ahead of oversold territory.

However, USD/CAD may trade within a more defined range over the coming days as it struggles to extend the series of higher highs and lows from the previous week, and it remains to be seen if the 418.5K rise in Canada Employment will sway the monetary policy outlook as part-time positions account for 345.3K of the headline figure, with full-time jobs increasing 73.2K in July.

In turn, the Bank of Canada (BoC) may continue to utilize its balance sheet to support the Canadian economy as the central bank pledges to carry out “its large-scale asset purchase program at a pace of at least $5 billion per week,” and Governor Tiff Macklem and Co. may retain a dovish forward guidance at the next interest rate decision on September 9 as the “Bank is prepared to provide further monetary stimulus as needed.

Until then, current market conditions may keep USD/CAD under pressure as the crowding behavior in the US Dollar carries into August even though the DXY Indextrades to fresh multi-year lows for the second consecutive week.

The IG Client Sentiment report shows retail traders have been net-long USD/CAD since mid-May, with 57.53% of traders currently net-long the pair as the ratio of traders long to short stands at 1.35 to 1. The number of traders net-long is 5.00% higher than yesterday and 18.51% lower from last week, while the number of traders net-short is 25.94% higher than yesterday and 24.00% higher from last week.

The decline in net-long interest suggests stop-loss orders were triggered last week as USD/CADtook out the March/June low (1.3315), while the rise in net-short position comes as the exchange rate struggles to extend the series of higher highs and lows from the previous week.

With that said, current market conditions may curb the recent rebound in USD/CAD as the crowding behavior in the US Dollar persists, and the exchange rate may trade within a more defined range over the coming days if the rebound from the August low (1.3233) fails to trigger a test of the monthly high (1.3451).

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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.
  • Nevertheless, USD/CAD reversed from the March low (1.3315) in June, with both price and the RSI carving an upward trend during the month, but the bullish formations have been largely negated as the exchange rate snapped the range bound price action during the first half of July.
  • USD/CAD managed to track the June range throughout the previous month as the RSI broke out of the downward trend established in July, and the failed attempt to push below 30 suggests the bearish momentum will continue to abate over the coming days as the indicator reverses course ahead of oversold territory.
  • As a result, USD/CAD appears to be making its way towards themonthly high (1.3451) after failing to close below the 1.3250 (23.6% expansion), but lack of momentum to extend the series of higher highs and lows from the August low (1.3233) may generate range bound conditions as the former support zone around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) appears to offering resistance.
  • Need a closing price below the 1.3250 (23.6% expansion) region to bring the 1.3170 (50% expansion) area on the radar, with the next area of interest comes in around 1.3110 (50% expansion).

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— Written by David Song, Currency Strategist

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