Canadian Dollar Talking Points
The Canadian Dollar tracks the recovery across commodity bloc currencies as USD/CAD slips to a fresh weekly low (1.2895), and fresh data prints coming out of the US may fuel the recent weakness in the exchange rate as the Personal Consumption Expenditure (PCE) Price Index is anticipated to show a slowdown in inflation.
USD/CAD Rally Unravels Ahead of US PCE Reportamid Failure to Test Yearly
USD/CAD looked poised to test the yearly high (1.3224) after clearing the opening range for August, but the advance from the 200-Day SMA (1.2763) unravels as the exchange rate snaps the series of higher highs and lows from last week.
Looking ahead, USD/CAD may continue to give back the rebound from the monthly low (1.2728) as the core US PCE, the Federal Reserve’s preferred gauge for inflation, is expected to narrow to 4.7% in July from 4.8% per annum the month prior, and evidence of easing price growth may influence the monetary policy outlook as the central bank aims to foster a soft-landing for the US economy.
As a result, speculation for smaller Fed rate hikes may lead to a larger pullback in USD/CAD as the central bank acknowledges that “it likely would become appropriate at some point to slow the pace of policy rate increases,” and it remains to be seen if the Federal Open Market Committee (FOMC) will adjust the forward guidance for monetary policy as Chairman Jerome Powell and Co. are slated to update the Summary of Economic Projections (SEP) at the next interest rate decision on September 21.
Until then, USD/CAD may struggle to retain the advance from earlier this month amid the failed attempt to test the yearly high (1.3224), and a further decline in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen earlier this year.
The IG Client Sentiment report shows 52.97% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.13 to 1.
The number of traders net-long is 5.28% higher than yesterday and 20.75% higher from last week, while the number of traders net-short is 5.82% lower than yesterday and 6.77% lower from last week. The jump in net-long interest has fueled the flip in retail sentiment as 46.51% of traders were net-long USD/CAD last week, while the decline in net-short position comes as the exchange rate trades a fresh weekly low (1.2895).
With that said, a slowdown in the US PCE may keep USD/CAD under pressure as it curbs speculation for another 75bp Fed rate hike, and the exchange rate may fall back towards the 200-Day SMA (1.2763) as it snaps the series of higher highs and lows from last week.
USD/CAD Rate Daily Chart
Source: Trading View
- USD/CAD appeared to be on track to test the yearly high (1.3224) after clearing the opening range for August, but the advance from the 200-Day SMA (1.2763) may continue to unravel as the exchange rate fails to hold above the 1.2980 (618% retracement) region.
- A break/close below the Fibonacci overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) may push USD/CAD towards the 200-Day SMA (1.2763), with a move below the 1.2770 (38.2% expansion) area raising the scope for a run at the monthly low (1.2728).
- However, failure to clear the overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) may push USD/CAD back towards the 1.2980 (618% retracement) region, with a move above the 1.3030 (50% expansion) to 1.3040 (50% expansion) area bringing the yearly high (1.3224) back on the radar.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong