Canadian Dollar Talking Points
The Canadian Dollar seems to be tracking the broader based weakness in commodity bloc currencies as USD/CAD trades to a fresh monthly high (1.2777), and fresh data prints coming out of the US may do little to deter the recent rally in the exchange rate as the Federal Reserve’s preferred gauge for inflation is expected to show sticky price growth.
Canadian Dollar Forecast: USD/CAD Rally Materializes Ahead of April Low
USD/CAD appears to have reversed course ahead of the April low (1.2403) as it extends the series of higher highs and lows from last week, and the exchange rate may continue to retrace the decline from the yearly high (1.2901) as the US Dollar benefits from the deterioration in risk appetite.
As a result, swings in investor confidence may sway USD/CAD over the coming days with the US stock market on the cusp of a bear market, and it remains to be seen if the update to the US Personal Consumption Expenditure (PCE) Price Index will influence the exchange rate as price growth is anticipated to slowdown for the first time since August.
The core PCE is seen narrowing to 5.3% from 5.4% in February, which is still the highest reading since 1983, and signs of sticky inflation may keep the Federal Open Market Committee (FOMC) on track to normalize monetary policy at a faster pace as the central bank “expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”
In turn, the US Dollar may continue to outperform against its Canadian counterpart ahead of the Fed rate decision on May 4 as the Greenback benefits from the deterioration in risk appetite, and a further advance in the exchange rate may continue to alleviate the tilt in retail sentiment like the behavior seen during the previous year.
The IG Client Sentiment report shows 52.17% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.09 to 1.
The number of traders net-long is 9.07% higher than yesterday and 19.04% lower from last week, while the number of traders net-short is 6.04% higher than yesterday and 2.77% lower from last week. The decline in net-long interest has helped to alleviate the crowding behavior as 62.94% of traders were net-long USD/CAD last week, while the decline in net-long position could be a function of stop-loss orders getting triggered as the exchange rate trades to a fresh monthly high (1.2777).
With that said, USD/CAD may continue to carve a series of higher highs and lows over the coming days as it reverses ahead of the monthly low (1.2403), and the update to the US PCE may do little to deter the recent rally in the exchange rate as swings investor confidence influence foreign exchange markets.
USD/CAD Rate Daily Chart
Source: Trading View
- USD/CAD appeared to be staging another attempt to test the November low (1.2352) as it struggled to trade back above the 50-Day SMA (1.2645), but the exchange rate appears to have reversed course ahead of the April low (1.2403) as it extends the series of higher highs and lows from last week
- Lack of momentum to test the Fibonacci overlap around 1.2410 (23.6% expansion) to 1.2440 (23.6% expansion) has pushed USD/CAD back above the 1.2620 (50% retracement) to 1.2650 (78.6% expansion) region, but need a close above 1.2770 (38.2% expansion) to open up the 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) area.
- Next region of interest comes in around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion), with a break above the yearly high (1.2901) opening up the December high (1.2964).
- However, failure to close above 1.2770 (38.2% expansion) may tame the recent rally in USD/CAD, with a move below the 1.2620 (50% retracement) to 1.2650 (78.6% expansion) region bringing the 1.2510 (78.6% retracement) area back on the radar.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong