USD/CAD Reveres from Fresh Yearly High Ahead of US PCE Report

Canadian Dollar Talking Points

USD/CAD snaps the series of higher highs and lows from last week as it sharply reverses from a fresh yearly high (1.3833), but an uptick in the US Personal Consumption Expenditure (PCE) Price Index may keep the exchange rate afloat as the Federal Reserve pursues a restrictive policy.

USD/CAD Reveres from Fresh Yearly High Ahead of US PCE Report

The recent rally in USD/CAD appears to be stalling after clearing the July 2020 high (1.3646) as the Relative Strength Index (RSI) falls back from an extreme reading, with the move below 70 in the oscillator raising the scope for a larger pullback in the exchange rate as a textbook sell signal takes shape.

However, the update to the US PCE may generate a bullish reaction in the Greenback as the core reading, the Fed’s preferred gauge for inflation, is expected to increase to 4.7% in August from 4.6% per annum the month prior, and signs of persist price growth may force the Federal Open Market Committee (FOMC) to retain its approach its combating inflation as the central bank pursues a restrictive policy.

As a result, the US Dollar may continue to outperform its Canadian counterpart as the Summary of Economic Projections (SEP) reflect a steeper path for the Fed Funds rate, and USD/CAD may exhibit a bullish trend throughout the remainder of the year as the Bank of Canada (BoC) appears to be on track to implement smaller rate hikes over the coming months.

The recent slowdown in Canada’s Consumer Price Index (CPI) may encourage the BoC to winddown its hiking-cycle as officials “expect the economy to moderate in the second half of this year,” and it remains to be seen if Governor Tiff Macklem and Co. will alter the forward guidance at the next meeting on October 26 as the central bank is slated to release the updated Monetary Policy Report (MPR).

Until then, developments coming out of the US may sway USD/CAD as market participants calculate the probability for another 75bp Fed rate hike, but a further advance in the exchange rate may fuel the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows only 29.80% of traders are currently net-long USD/CAD, with the ratio of traders short to long standing at 2.36 to 1.

The number of traders net-long is 1.33% higher than yesterday and 19.72% lower from last week, while the number of traders net-short is 1.47% lower than yesterday and 15.17% lower from last week. The decline in net-long position comes as USD/CAD sharply reverses from a fresh yearly high (1.3833), while the drop in net-short interest has done little to alleviate the crowding behavior as 30.45% of traders were net-long the pair last week.

With that said, the update to the US PCE may prop up USD/CAD should the data print fuel speculation for another 75bp Fed rate hike, but a move below 70 in the Relative Strength Index (RSI) raises the scope for a larger pullback in the exchange rate as a textbook sell signal takes shape.

USD/CAD Rate Daily Chart

Source: Trading View

• USD/CAD snaps the series of higher highs and lows from last week as it reveres from a fresh yearly high (1.3833), and looming developments in the Relative Strength Index (RSI) may point to a larger pullback in the exchange rate if the oscillator struggles to hold in overbought territory.
• Lack of momentum to hold above the 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion) region may push USD/CAD back towards 1.3540 (23.6% retracement), with a break/close below the 1.3460 (61.8% retracement) area opening up the 1.3400 (23.6% expansion) handle.
• However, USD/CAD may continue to appreciate as long as the RSI holds above 70, with a move back above the 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion) region bringing the 1.3800 (161.8% expansion) handle back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong