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USD/CAD rebound materializes ahead of BoC interest rate decision

By on January 24, 2022 0

Canadian Dollar Talking Points

USD/CAD extends the rebound from the monthly low (1.2450) following the series of failed attempts to close below the 200-day SMA (1.2498), and the interest rate decision of the Bank of Canada (BoC) may do little to derail the recent advance in the exchange rate if the central bank continues to take a wait-and-see approach to monetary policy.

USD/CAD rebound materializes ahead of BoC interest rate decision

USD/CAD plots a series of higher highs and lows ahead of BoC and Federal Reserve rate decisions to come later this week, and more from the Governor Tiff Macklem and Co. can keep the bullish price action intact as “tThe economy continues to require considerable monetary policy support.

Look forward, the U.S. dollar could continue to outperform its Canadian counterpart as long as the BoC remains “committed to keeping the policy interest rate at the effective lower boundbut new central bank projections could dampen USD/CAD’s recent advance if Governor Macklem and Co. reveals a change in forward monetary policy guidance.

As a result, USD/CAD may face increased volatility in the Federal Open Market Committee (FOMC) as chair Jerome Powell and Co. plan to implement higher interest rates later this year, and speculation of an impending regime change could keep the exchange rate afloat as the FedWatch CME Tool reflects a greater than 90% probability of a 25 basis point rate hike in March.

In turn, USD/CAD may continue to retrace the decline from the monthly high (1.2814) as market participants brace for higher US interest rates, and further appreciation in the US dollar rate. Foreign exchange could continue to mitigate the tilt in retailer sentiment similar to the behavior seen over the previous year.

Image of IG client sentiment for USD/CAD rate

the IG Customer Opinion Report shows 67.05% of traders are currently long fillet USD/CAD, with the ratio of long to short traders upright at 2.04 to 1.

The number of net long traders is 1.18% lower than yesterday and 15.90% lower than last week, while the number of net short traders is 29.47% higher than yesterday. yesterday and 4.24% higher than last week. The drop in the net long position comes as USD/CAD extends the advance from the monthly low (1.2450), while the rise in net short interest helped ease the crowding behavior as 75.89% of traders were net long on the pair earlier. this month.

That said, the recent price action raises the possibility of a larger USD/CAD bounce as it carves out a series of higher highs and lows, and the the decline from the December high (1.2964) could prove to be a correction of the general trend if the Bank of Canada adopts a wait-and-see approach to monetary policy.

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 taken broke above the December low (1.2606) as it failed to defend the opening range for january, corn the decline from the December high (1.2964) could prove to be a correction of the general trend amid series of failed attempts to close below the 200-day SMA (1.2498).
  • The recent series of higher highs and lows pushed USD/CAD back above the Fibonacci straddle around 1.2620 (50% retracement) to 1.2650 (78.6% expansion), with a break/close above the 50-day SMA (1.2703) 1.2770 (38.2% expansion) area on the radar.
  • A break above the monthly high (1.2814) opens the overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion), with the next region of interest around 1.2980 (61.8% retracement) to 1.3030 (50% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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