Canadian Dollar Talking Points
USD/CAD trades back above the 50-Day SMA (1.2854) as it bounces back from a fresh monthly low (1.2816), and the Federal Reserve interest rate decision may keep the exchange rate above the moving average as the central bank is expected to deliver another 75bp rate hike.
USD/CAD Climbs Back Above 50-Day SMA Ahead of Fed Rate Decision
USD/CAD attempts to retrace the decline from the start of the week despite the larger-than-expected decline in the Conference Board’s Consumer Confidence survey, and the Fed’s hiking cycle may keep the exchange rate afloat as the US central bank adjusts monetary policy faster than its Canadian counterpart.
As a result, the Federal Open Market Committee (FOMC) rate decision may generate a bullish reaction in USD/CAD as the central bank prepares US households and businesses for a restrictive policy, and the exchange rate may continue to trade to fresh yearly highs over the coming months if the committee retains its current approach in combating inflation.
Source: Atlanta Fed
However, the growing threat of a recession may force the FOMC to deliver smaller rate hikes as the Atlanta Fed GDPNow model states that the “estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.6 percent on July 19, down from -1.5 percent on July 15,” and a shift in the Fed’s forward guidance may produce headwinds for the US Dollar if Chairman Jerome Powell and Co. look to winddown the hiking cycle over the coming months.
In turn, USD/CAD may mirror the price action from May if it struggles to hold above the 50-Day SMA (1.2854), and a further decline in the exchange rate may fuel the shift in retail sentiment like the behavior seen earlier this year.
The IG Client Sentiment report shows 61.34% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.59 to 1.
The number of traders net-long is 6.30% higher than yesterday and 21.88% higher from last week, while the number of traders net-short is 3.04% lower than yesterday and 7.14% lower from last week. The jump in net-long interest has fueled the flip in retail sentiment as 60.19% of traders were net-long USD/CAD last week, while the decline in net short position comes as the exchange rate bounces back from a fresh monthly low (1.2816).
With that said, the Fed rate decision may keep USD/CAD above the 50-Day SMA (1.2854) as long as the central bank retains the current course for monetary policy, but the exchange rate may largely mirror the price action from May if it fails to hold above the moving average.
USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, the failed attempt to test the November 2020 high (1.3371) has led to a near-term pullback in USD/CAD, with the exchange rate now trading back above the 50-Day SMA (1.2854) after struggling to close below the Fibonacci overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion).
- In turn, USD/CAD may push towards the 1.2980 (618% retracement) area as it attempts to retrace the decline from the start of the week, but the exchange rate may largely mirror the price action from May if it struggles to hold above the moving average.
- A close below the overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) brings the 1.2770 (38.2% expansion) area on the radar, with a move below the 200-Day SMA (1.2713) opening up the 1.2610 (50% retracement) to 1.2650 (78.6% expansion) region.
- Need a break/close above 1.2980 (618% retracement) to bring the 1.3030 (50% expansion) to 1.3040 (50% expansion) region back on the radar, with the next area of interest coming in around the 1.3200 (38.2% expansion) handle.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong