USD/CAD Rate Searches for Resistance as RSI Tracks Upward Trend


Canadian Dollar Talking Points

USD/CAD extends the advance from earlier this week to trade to a fresh monthly high (1.3418), and the exchange rate may continue to search to resistance as long as the Relative Strength Index (RSI) tracks the upward trend established in September.

USD/CAD Rate Searches for Resistance as RSI Tracks Upward Trend

USD/CAD has pushed back above the former-support zone around the March/June low (1.3315) on the back of US Dollar strength, with the appreciation in the Greenback largely coinciding with the weakness in global equity prices as there appears to be shift in risk appetite.

The Federal Reserve interest rate decision appears to have sapped investor confidence as the update to the Summary of Economic Projections (SEP)showed the longer run interest rate forecast unchanged from the June meeting, and it seems as though the Federal Open Market Committee (FOMC) will rely on its current tools to support the US economy as the central bank vows to “increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace.”

In turn, the FOMC may continue to endorse a wait-and-see approach as Chairman Jerome Powell tells US lawmakers that “many economic indicators show marked improvement,” and it seems as though the Fed is in no rush to adjust the path for monetary policy as Governor Randal Quarles insists that “the economy has rebounded more strongly than almost any forecaster expected.

Governor Quarles states that “the Committee will be closely watching for a further recovery of inflation and signs that inflation expectations remain well anchored as we set monetary policy” while speaking at a virtual event hosted by the Institute of International Bankers, with the official going onto say that “I am optimistic that the United States can avoid the highly adverse outcomes that many feared would materialize.

The comments suggest the FOMC will continue to adjust its current tools rather than deploy more non-standard measures as the US economy appears to have avoided the worst-case scenario, and it seems as though Chairman Powell and Co. will stick to the same script at the next interest rate decision on November 5 as “it will take continued support to sustain a robust recovery.

Until then, the crowding behavior in USD/CAD looks poised to persist even though the Fed’s balance sheet holds above $7 trillion in September as traders have been net-long the pair since mid-May.

The IG Client Sentiment report shows 61.86% of traders are still net-long USD/CAD, with the ratio of traders long to short at 1.62 to 1.The number of traders net-long is 16.64% lower than yesterday and 24.63% lower from last week, while the number of traders net-short is 17.11% higher than yesterday and 23.76% higher from last week.

The decline in net-long position could be a function of profit-taking behavior as USD/CAD trades to a fresh monthly high (1.3418), while the rise in net-short position has helped to alleviate the tilt in retail sentiment as 68.59% of traders were net-long USD/CAD earlier this week.

Nevertheless, the crowding behavior in USD/CAD may carry into the end of the month even though the Fed plans to “achieve inflation that averages 2 percent over time,” and the exchange rate may continue to search to resistance as long as the Relative Strength Index (RSI) tracks the upward trend established in September.

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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 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 has spurred 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, with the oscillator quickly recovering from oversold territory.
  • As a result, the advance from the monthly low (1.2994) has pushed USD/CAD above 50-Day SMA (1.3264) for the first time since May, with the exchange rate trading back above the former-support zone around the March/June low (1.3315).
  • The close above the Fibonacci overlap around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement) brings the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region on the radar as the RSI establishes an upward trend in September, with the next area of interest coming in around 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement).

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— Written by David Song, Currency Strategist

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