USD/CAD extends bearish price streak ahead of US retail sales report

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Canadian Dollar Talking Points

USD/CAD rebounds from a new monthly low (1.2453) as a growing number of Federal Reserve officials adopt a hawkish tone, but the exchange rate remains likely to fall further as it extends the series of lower highs and lower lows since the start of the week.

USD/CAD extends bearish price streak ahead of US retail sales report

USD/CAD appears to be in the midst of a broader correction as it clears the December low (1.2606), and the exchange rate may continue to give back the advance from the October low ( 1.2288) as new data printouts come out of the US expected to show slowing economic activity.

The U.S. retail sales report is expected to show household spending remains stable in December, while the U. of Michigan Confidence survey is expected at reflect a decline in consumer sentiment, and a batch of dismal data printouts may keep USD/CAD under pressure as it encourages the Federal Reserve to delay monetary policy normalization.

As a result, USD/CAD may continue to depreciate ahead of the Federal Open Market Committee’s (FOMC) next interest rate decision on January 26, as it fails to defend the monthly opening range, but a further decline in the exchange rate could fuel the recent reversal in retailer sentiment, similar to the behavior seen in the previous year.

Image of IG client sentiment for USD/CAD rate

the IG Customer Opinion Report shows 75.89% of merchants are currently long fillet USD/CAD, with the ratio of long to short traders upright at 3:15 a.m. to 1 a.m.

The number of net long traders is 13.09% higher than yesterday and 58.75% higher than last week, while the number of net short traders is 20.92% lower than yesterday. yesterday and 16.62% lower than last week. The surge in net buying interest fueled the tilt in sentiment among retailers as 65.87% of traders were net long on USD/CAD earlier this week, while the decline in the net short position occurs while the exchange rate is trading at a new monthly low (1.2453).

That said, the decline from the December high (1.2964) could prove to be a correction to the broader trend as the FOMC appears to be on track to implement higher interest rates in 2022, but recent price action raises the possibility of further exchange rate decline as it extends the series of lower highs and lower lows since the start of the week.

USD/CAD daily rate chart

Image of daily USD/CAD rate chart

Source: Commercial view

  • Keep in mind that USD/CAD traded to a new 2021 high (1.2964) in December even as the Relative Strength Index (RSI) diverged with the price, but the exchange rate seems to have reversed its course following the failed attempt to test the December 2020 high (1.3009).
  • USD/CAD breached December lows (1.2606) as it failed to defend the monthly opening range, with the recent series of lower highs and lower lows pushing the exchange rate below the 200-day SMA (1.2498) for the first time since November.
  • Need a break/close below 1.2410 (23.6% expansion) to 1.2440 (23.6% expansion) bring the 1.2360 (100% expansion) region on the radar, with a break below the October low (1.2288) opening the zone from 1.2250 (50% expansion) to 1.2260 (38.2% expansion).
  • However, the lack of momentum for break/close below 1.2410 (23.6% expansion) area at 1.2440 (23.6% expansion) could push the USD/CAD back down Fibonacci straddle around 1.2620 (50% retracement) to 1.2650 (78.6% expansion), with a displacement above 1.2770 (38.2% expansion opening 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) Region.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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