Canadian Dollar Talking Points

USD/CAD trades to a fresh yearly low (1.2736) following the Bank of Canada’s last meeting for 2020, and the Relative Strength Index (RSI) warns of a further decline in the exchange rate as it holds below 30 and sits in oversold territory.

USD/CAD Forecast: Post-BoC Breakdown Keeps RSI in Oversold Zone

USD/CAD snaps the range bound price action from earlier this week despite the limited reaction to the BoC interest rate decision, and it seems as though key market trends will continue to influence the exchange rate over the remainder of the year as the US Dollar continues to broadly reflect an inverse relationship with investor confidence.

Swings in risk appetite may continue to sway USD/CAD as the BoC endorses a wait-and-see approach ahead of 2021, and Governor Tiff Macklem and Co. may stick to the same script at its next meeting on January 20 as the central bank pledges to “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.

It seems as though the BoC will rely on its current tools to support the Canadian economy as the central bank plans to carry out “its QE program until the recovery is well underway and will adjust it as required,” and key market trends may keep USD/CAD under pressure in 2021 as Governor Macklem and Co. acknowledge that “a broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar.

Image of IG Client Sentiment for USD/CAD rate

At the same time, the tilt in retail sentiment looks poised to persist as traders have been net-long USD/CAD since mid-May, with the IG Client Sentiment report showing 74.96% of traders still net-long the pair as the ratio of traders long to short stands at 2.99 to 1.

The number of traders net-long is 0.11% higher than yesterday and 7.18% higher from last week, while the number of traders net-short is 5.71% lower than yesterday and 9.77% lower from last week. The decline in net-short position could be a function of profit taking behavior as USD/CAD trades to a fresh yearly low (1.2736), but the tilt in retail sentiment looks poised to persist amid the rise in net-long interests.

With that said, key market trends may keep USD/CAD under pressure as the US Dollar continues to reflect an inverse relationship with investor confidence, and the Relative Strength Index (RSI) warns of a further decline in the exchange rate as the indicator holds below 30 and sits in oversold territory.

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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 in June.
  • USD/CAD tracked 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 (1.3088) 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 as the RSI continues to track the downward trend established in November and pushes into oversold territory for the first time since June, with the exchange rate trading to a fresh yearly low (1.2736) as it snaps the range bound price action from earlier this week.
  • Still need a close below 1.2770 (38.2% expansion) to bring the 1.2620 (50% retracement) area on the radar, with the next region of interest coming in around 1.2490 (161.8% expansion) to 1.2510 (78.6% retracement).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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