Canadian Dollar Talking Points
USD/CAD showed a limited reaction to a larger-than-expected decline in Canada Employment, and key market trends may continue to influence the exchange rate as the US Dollar still reflects an inverse relationship with investor confidence.
USD/CAD Rates to Watch Following Canada Employment Report
USD/CAD appears to be stuck in a narrow range after taking out the 2020 low (1.2688) earlier this week, and swings in risk appetite may sway the exchange rate ahead of the next Bank of Canada (BoC) meeting on January 20 as the central bank plans to carry out its quantitative easing (QE) program “at its current pace of at least $4 billion per week.”
It remains to be seen if the fresh data prints coming out of Canada will influence the monetary policy outlook as the employment report shows a 62.6K contraction in December versus forecasts for a 27.5K decline, but the BoC may continue to endorse a dovish forward guidance at its first meeting for 2021 as Governor Tiff Macklem and Co. “remain committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”
Until then, key market themes may continue to influence USD/CAD as the BoC acknowledges that “a broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar,” and the tilt in retail sentiment also looks poised to persist as traders have been net-long the pair since May 2020.
The IG Client Sentiment report shows 68.91% of traders are still net-long USD/CAD, with the ratio of traders long to short standing at 2.22 to 1. The number of traders net-long is 5.56% higher than yesterday and 18.40% higher from last week, while the number of traders net-short is 7.46% higher than yesterday and 33.33% higher from last week.
The rise in net-short interest comes as the rebound from the weekly low (1.2630) appears to have stalled ahead of the weekend, while the rise in net-long interest has fueled the crowding behavior in USD/CAD as 61.74% of traders were net-long the pair earlier this week.
With that said, USD/CAD may continue to consolidate ahead of the next BoC meeting as it appears to be stuck in a narrow range, but swings in risk appetite sway the exchange rate as the US Dollar still broadly reflects an inverse relationship with investor confidence.
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USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, USD/CAD cleared the January low (1.2957) following the US election, with the exchange rate trading to fresh yearly lows in November and December as the Relative Strength Index (RSI) established a downward trend.
- USD/CAD started off 2021 by taking out last year’s low (1.2688) even though the RSI has broke out of the bearish formation, with lack of momentum to hold above the 1.2770 (38.2% expansion) region pushing the exchange rate towards the 1.2620 (50% retracement) area.
- However, the failed attempt to test the 1.2620 (50% retracement) area may lead to a near-term correction in USD/CAD as the RSI appears to be reversing ahead of oversold territory, with a break/close above 1.2770 (38.2% expansion) bringing the 1.2830 (38.2% retracement) region back on the radar.
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong