USD/CAD Rate Trades to Fresh Yearly Low as RSI Tracks Downward Trend

Canadian Dollar Talking Points

USD/CAD takes out the November low (1.2923) despite the limited reaction to Canada’s Gross Domestic Product (GDP) report, and key market trends may keep the exchange rate under pressure as the US Dollar continues to reflect an inverse relationship with investor confidence.

USD/CAD Rate Trades to Fresh Yearly Low as RSI Tracks Downward Trend

USD/CAD tags a fresh yearly low (1.2916) even though Canada’s GDP report fell short of market expectations, with the growth rate expanding 40.5% in the third quarter of 2020 versus projections for a 47.6% print.

Image of DailyFX economic calendar for calendar

It remains to be seen if the update to Canada’s Employment report will influence the near-term outlook for USD/CAD as the economy is expected to add another 20.0K jobs in November, but the fresh data prints may do little to sway the monetary policy outlook as the Bank of Canada (BoC) scales back its emergency measures ahead of 2021.

It seems as though the BoC will largely endorse a wait-and-see approach at its last meeting for 2020 as Governor Tiff Macklem emphasizes that “the focus of our bond purchases has shifted squarely to providing the monetary stimulus required to support the recovery,” and the central bank may merely attempt to buy time on December 9 as the board insists that the “QE program will continue until the recovery is well underway.

In turn, swings in risk appetite may influence USD/CAD ahead of Canada’s Employment report as the US Dollar continues to reflect an inverse relationship with investor confidence, and it looks as though the tilt in retail sentiment will also persist throughout the remainder of the year as traders have been net-long the pair since mid-May.

Image of IG Client Sentiment for USD/CAD rate

The IG Client Sentiment report shows 72.49% of traders are still net-long USD/CAD, with the ratio of traders long to short standing at 2.64 to 1. The number of traders net-long is 1.39% higher than yesterday and 5.29% higher from last week, while the number of traders net-short is 25.76% higher than yesterday and 25.28% higher from last week.

The rise in net-short position comes as USD/CAD takes out the November low (1.2923), while the rise in net-long interest has spurred a further tilt in retail sentiment as 71.89% of traders were net-long the pair at the start of the week.

With that said, key market trends may keep USD/CAD under pressure as the tilt in retail sentiment persists, with the Relative Strength Index (RSI) exhibiting a similar dynamic as it continues to track the downward trend established in November.

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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 (1.3154) for the first time since May, but the exchange rate 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.
  • A similar scenario took shape in October as USD/CAD tracked the September range, but the exchange rate cleared the January low (1.2957) following the US election to trade to a fresh 2020 low (1.2923) in November.
  • USD/CAD remains under pressure in December, with the exchange rate trading to fresh yearly lows (1.2916) as the RSI continues to track the downward trend established in November.
  • The close below the 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement) zone bringing the 1.2830 (38.2% retracement) area on the radar, with the next region of interest coming in around 1.2770 (38.2% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong




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