USD/CAD Rate Clears October Opening Range Ahead of US CPI

Canadian Dollar Talking Points

USD/CAD clears the opening range for October as it trades to fresh yearly high (1.3855), and fresh data prints coming out of the US may keep the exchange rate afloat as the Consumer Price Index (CPI) is anticipated to show sticky inflation.

USD/CAD Rate Clears October Opening Range Ahead of US CPI

USD/CAD extends the series of higher highs and lows from last week following the kneejerk reaction to the larger-than-expected rebound in Canada Employment, and a move above 70 in the Relative Strength Index (RSI) is likely to be accompanied by a further appreciation in the exchange rate like the price action from last month.

As a result, USD/CAD may continue to trade to fresh yearly highs as it appears to be tracking the positive slope in the 50-Day SMA (1.3210), and the update to the US CPI may instill a bullish outlook for the exchange rate as the core rate is expected to increase to 6.5% in September from 6.3% per annum the month prior.

In turn, the Federal Reserve may stick to the existing approach in combating inflation as the central bank pursues a restrictive policy, and the Federal Open Market Committee (FOMC) may implement another 75bp rate hike at the next interest rate decision on November 2 as the Summary of Economic Projections (SEP) reflect a steeper path for US rates.

Meanwhile, the 21.1K rise in Canada Employment may do little to influence the Bank of Canada (BoC) as the central bank has yet to show any interest in carrying out restrictive policy, and it remains to be seen if Governor Tiff Macklem and Co. will alter the forward guidance at the next meeting on October 26 as the board is scheduled to release the updated Monetary Policy Report (MPR).

Until then, developments coming out of the US may keep USD/CAD afloat as the FOMC shows no indications of slowing its hiking-cycle, and a further advance in the exchange rate may fuel the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows only 31.05% of traders are currently net-long USD/CAD, with the ratio of traders short to long standing at 2.22 to 1.

The number of traders net-long is 10.26% lower than yesterday and 11.87% lower from last week, while the number of traders net-short is 4.23% lower than yesterday and 3.20% lower from last week. The decline in net-long position comes as USD/CAD clears the opening range for October, while the drop in net-short interest has done little alleviate the crowding behavior as 31.45% of traders were net-long the pair last week.

With that said, the update to the US CPI may fuel the recent advance in USD/CAD as the core rate of inflation is expected to increase for the second straight month, and a move above 70 in the Relative Strength Index (RSI) is likely to be accompanied by a further appreciation in the exchange rate like the price action from last month.

USD/CAD Rate Daily Chart

Source: Trading View

• USD/CAD clears the opening range for October as it extends the series of higher highs and lows from last week, and the exchange rate may continue to trade to fresh yearly highs as it appears to be tracking the positive slope in the 50-Day SMA (1.3211).
• At the same time, a move above 70 in the Relative Strength Index (RSI) is likely to be accompanied by a further appreciation in USD/CAD like the price action from last month, with a close above the 1.3800 (161.8% expansion) handle opening up the Fibonacci overlap around 1.4040 (23.6% retracement) to 1.4130 (100% expansion) area.
• However, the RSI may start to diverge with price if it struggles to push into overbought territory, and lack of momentum to hold above the 1.3800 (161.8% expansion) handle may push USD/CAD back towards the 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion) region, with the next area of interest coming in around 1.3540 (23.6% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong