Canadian Dollar Talking Points
USD/CAD attempts to retrace the decline following the US Non-Farm Payrolls (NFP) report as it bounces back from a fresh monthly low (1.2610), but failure to defend the opening range for January raises the scope for a further decline in the exchange rate as it carves a series of lower highs and lows.
USD/CAD Rate Vulnerable After Snapping January Opening Range
USD/CAD appears to have reversed course after failing to test the December 2020 high (1.3009), and the decline from the 2021 high (1.2964) may develop into a broader correction as the update to Canada’s Employment report puts pressure on the Bank of Canada (BoC) to normalize monetary policy.
The ongoing improvement in Canada’s labor market may encourage the BoC to adjust the forward guidance for monetary policy as the central bank acknowledges that “broad-based job gains in recent months that have brought the employment rate essentially back to its pre-pandemic level.”
As a result, the BoC may follow a similar path to its US counterpart after concluding its quantitative easing (QE) program in November, and it remains to be seen if the central bank will prepare Canadian households and businesses for higher interest rates at its next meeting on January 26 as Governor Tiff Macklem and Co. pledge to “provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.”
Until then, USD/CAD may face a larger correction as it fails to defend the opening range for January, but a further decline in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen during the previous year.
The IG Client Sentiment report shows 65.87% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.93 to 1.
The number of traders net-long is 6.49% higher than yesterday and 31.99% higher from last week, while the number of traders net-short is 20.20% higher than yesterday and 2.72% lower from last week. The jump in net-long interest has fueled the recent shift in retail sentiment as 46.25% of traders were net-long USD/CAD in mid-December, while the decline in net-short position comes as the exchange rate bounces back from a fresh monthly low (1.2610).
With that said, the decline from the 2021 high (1.2964) may develop into a broader correction as USD/CAD fails to defend the opening range for January, and the exchange rate may continue to depreciate over the coming days as it carves a series of lower highs and lows.
USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, USD/CAD traded to a fresh 2021 high (1.2964) in December even as the Relative Strength Index (RSI) diverged with price, but the exchange rate appears to have reversed course following the failed attempt to test the December 2020 high (1.3009).
- Failure to defend the opening range for January raises the scope for a further decline in USD/CAD as it carves a series of lower highs and lows, but need a close below the Fibonacci overlap around 1.2620 (50% retracement) to 1.2650 (78.6% expansion) to bring the 1.2510 (78.6% expansion) region on the radar.
- A move below the 200-Day SMA (1.2499) opens up the 1.2410 (23.6% expansion) to 1.2440 (23.6% expansion) area, with the next region of interest coming in around 1.2360 (100% expansion).
- However, lack of momentum to close below the Fibonacci overlap around 1.2620 (50% retracement) to 1.2650 (78.6% expansion) may push USD/CAD back towards the 1.2770 (38.2% expansion), with the next area of interest coming in around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion).
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong