Canadian Dollar: USD/CAD Weakness To Persist As RSI Snaps Upward Trend

USD/CAD trades to a fresh monthly low (1.2661) following the failed attempt to test the January high (1.2881), and the rebound from the yearly low (1.2589) appears to have been a correction in the broader trend rather than a change in behavior as key market themes remain in place.

It seems as though the US Dollar will continue to reflect an inverse relationship with investor confidence as the Federal Reserve relies on its non-standard tools to achieve its policy targets, and the central bank may utilize its balance sheet throughout 2021 as Chairman Jerome Powellwarns that “we are still very far from a strong labor market.”

As a result, swings in risk appetite may continue to sway USD/CAD as the Federal Open Market Committee (FOMC) stays on track 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 seems as though the Bank of Canada (BoC) will follow a similar approach as Governor Tiff Macklem and Co. insist that “the Bank will continue its QE (quantitative easing) program until the recovery is well underway.”

In turn, USD/CAD may continue to track a bearish trend as the BoC acknowledges that “a broad-based decline in the US exchange rate combined with stronger commodity prices have led to a further appreciation of the Canadian dollar,” but the tilt in retail sentiment looks poised to persist as traders have been net-long the pair since May 2020.

Image of IG Client Sentiment for USD/CAD rate

The IG Client Sentiment report shows 68.66% of traders are still net-long USD/CAD, with the ratio of traders long to short standing at 2.19 to 1.

The number of traders net-long is 4.84% higher than yesterday and 9.29% higher from last week, while the number of traders net-short is 5.07% higher than yesterday and 15.08% higher from last week. The rise in net-short position comes as USD/CAD trades to a fresh monthly low (1.2661), while the increase in net-long interest has spurred a further tilt in retail sentiment as 62.30% of traders were net-long the pair earlier this week.

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