USD/CAD Under Pressure as BoC Highlights Limits of Monetary Policy

Canadian Dollar Talking Points

USD/CAD tags a fresh monthly low (1.3132) as Bank of Canada (BoC) Senior Deputy Governor Carolyn Wilkins highlights the “limits of monetary policy to solving all problems,” and the failed attempt to test the January low (1.2957) in August may prove to be an exhaustion in the bearish behavior rather than a change in trend as key market themes look poised to persist in September.

USD/CAD Under Pressure as BoC Highlights Limits of Monetary Policy

USD/CAD struggles to preserve the range bound price action carried over from the previous week as BoC’s Wilkins emphasizes that “monetary policy is ill-equipped to deal with sector-specific issues,” with the official going onto say “there are many other policies that are well suited to deal with sector-specific issues.

The comments suggests the BoC will rely on its current tools to support the Canadian economy as Wilkins warns that “central banks are likely to run out of conventional firepower if we see an economic downturn in a low-interest-rate world,” and it seems as though Governor Tiff Macklem and Co. are in no rush to alter the path for monetary policy as the central bank pledges to carry out “its large-scale asset purchase program at a pace of at least $5 billion per week.

In turn, the BoC appears to be on track to retain the current policy at the next meeting on September 9 as Deputy Governor Lawrence Schembri insists that “our extraordinary policy actions have been firmly focused on attaining our inflation target, by supporting demand and employment throughout this difficult and protracted economic recovery,” and USD/CAD may continue to give back the advance from the start of the year as key market themes look poised to persist in September.

It remains to be seen if the Federal Reserve Economic Symposium will influence the near-term outlook for USD/CAD as the Federal Open Market Committee (FOMC) mulls an outcome-based approach versus a calendar-based forward guidance for monetary policy, but the event may largely indicate more of the same for the next interest rate decision on September 16 as the central bank extends its lending facilities through the end of the year, while the committee votes unanimously to push back “the expiration of the temporary U.S. Dollar liquidity swap lines through March 31, 2021.”

As a result, current market trends may carry into September as the BoC and FOMCstick to the status quo, and the crowding behavior in the US Dollar also looks poised to persist over the coming days as retail traders have been net-long USD/CAD since mid-May.

The IG Client Sentiment report shows 71.93% of traders are still net-long USD/CAD, with the ratio of traders long to short at 2.56 to 1. The number of traders net-long is 17.45% higher than yesterday and 21.32% higher from last week, while the number of traders net-short is 35.05% lower than yesterday and 14.69% lower from last week.

The decline in net-short position could be indicative of profit taking behavior as USD/CAD tags a fresh monthly low (1.3132), while the rise in net-long interest suggests the crowding behavior in the Greenback will carry into September even though the Fed’s balance sheet climbs back above $7 trillion in August.

With that said, the widening Fed’s balance sheet along with the crowding behavior in the US Dollar may keep USD/CAD under pressure, the failed attempt to test the January low (1.2957) in August may prove to be an exhaustion in the bearish behavior rather than a change in trend as key market themes look poised to persist in September.

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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 for the first time since the start of the year.
  • Nevertheless, USD/CAD reversed from the March low (1.3315) in June, with both price and the RSI carving an upward trend during the month, but the bullish formations have been largely negated as the exchange rate snapped the range bound price action during the first half of July.
  • USD/CAD managed to track the June range throughout the previous month as the RSI broke out of the downward trend established in July, but the failed attempt to push back above the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region has spurred a break of the March/June low (1.3315) even though the momentum indicator failed to push into oversold territory.
  • The RSI appears to be deviating with price as it struggles to push into oversold territory, but the failed attempts to break below 30 may indicate a potential exhaustion in the bearish price action rather than a change in trend as the 50-Day SMA (1.3421) continues to track a negative slope.
  • Meanwhile, a ‘death cross’ formation seemed to have taken shape in August as the 50-Day SMA (1.3421) crossed below the 200-Day SMA (1.3529), but the difference in slope undermines the bearish signal as USD/CAD fails to test the January low (1.2957) ahead of September.
  • Lack of momentum to test 1.3110 (50% expansion) may push USD/CAD back above the 1.3170 (50% expansion) region, but the exchange rate may continue to face range bound conditions as it appears to be capped by the 1.3250 (23.6% expansion) area.
  • Need a break/close above 1.3250 (23.6% expansion) to open up the former support-zone around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement), which lines up with the March/June low (1.3315).
  • At the same time, need a break//close below 1.3110 (50% expansion) to open up the Fibonacci overlap around 1.3030 (50% expansion) to 1.3040 (61.8% expansion), with the next area of interest coming in around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), which lines up with the January low (1.2957).

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— Written by David Song, Currency Strategist

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