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USD/CAD Post-Fed Pullback at Risk as RSI Recovers From Oversold Zone

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Canadian Dollar Talking Points

USD/CAD tracks the range bound price action from earlier this week as the Federal Reserve sticks to the sidelines at its last meeting for 2020, but the exchange rate may stage a near-term correction over the coming days as the Relative Strength Index (RSI) appears to be bouncing back from oversold territory to threaten the downward trend carried over from November.

USD/CAD Post-Fed Pullback at Risk asRSI Recovers From Oversold Zone

USD/CAD pulls back from the weekly high (1.2790) as the Federal Open Market Committee (FOMC) reiterates that the central bank remains “prepared to adjust the stance of monetary policy as appropriate,” and it seems as though the Fed will retain a wait-and-see approach over the coming months as “fewer participants see the balance of risks as weighted to the downside than in September.

The comments suggest the FOMC will rely on its current tools to support the US economy as the central bank plans to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage backed securities by at least $40 billion per month, and it remains to be seen if the Fed will change its tone in 2021 as Chairman Jerome Powell insists that “if progress toward our goals were to slow, the guidance would convey our intention to increase policy accommodation through a lower expected path of the federal funds rate and a higher expected path of the balance sheet.

In turn, key market trends look poised to persist as the US Dollar still reflects an inverse relationship with investor confidence, and swings in risk appetite may continue to sway USD/CAD as the Bank of Canada (BoC) acknowledges 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 may carry into 2021 as trades have been net-long USD/CAD since mid-May, with the IG Client Sentiment report showing 70.61% of traders net-long the pair as the ratio of traders long to short stands at 2.40 to 1.

The number of traders net-long is 0.82% higher than yesterday and 8.51% lower from last week, while the number of traders net-short is 8.16% higher than yesterday and 14.01% higher from last week. The decline in net-long position comes as USD/CAD tracks the range bound price action from earlier this week, while the rise in net-short interest has helped to alleviate the tilt in retail sentiment as 74.96% of traders were net-long the pair during the previous week.

With that said, key market trends may keep USD/CAD under pressure as it trades to fresh yearly lows in December, but the exchange rate may stage a near-term correction over the coming days as the Relative Strength Index (RSI) appears to be bouncing back from oversold territory to threaten the downward trend carried over from November.

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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 (1.3035) 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 (1.2688) as it snaps the range bound price action from earlier in the month.
  • As a result, a similar scenario may materialize over the coming days as USD/CAD struggles to push back above the 1.2770 (38.2% expansion) region, with a break/close below the 1.2620 (50% retracement) area bringing the Fibonacci overlap around 1.2490 (161.8% expansion) to 1.2510 (78.6% retracement) on the radar.
  • However, USD/CAD may stage a near-term correction as the RSI appears to be bouncing back from oversold territory to threaten the downward trend carried over from November, with a close above the 1.2770 (38.2% expansion) region opening up the 1.2830 (38.2% retracement) area.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong



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