USD/CAD Forecast: Post-BoC Breakdown Keeps RSI In Oversold Zone

CANADIAN DOLLAR TALKING POINTS

USD/CAD trades to a fresh yearly low (1.2736) following the Bank of Canada’s last meeting for 2020, and the Relative Strength Index (RSI) warns of a further decline in the exchange rate as it holds below 30 and sits in oversold territory.

USD/CAD FORECAST: POST-BOC BREAKDOWN KEEPS RSI IN OVERSOLD ZONE

USD/CAD snaps the range bound price action from earlier this week despite the limited reaction to the BoC interest rate decision, and it seems as though key market trends will continue to influence the exchange rate over the remainder of the year as the US Dollar continues to broadly reflect an inverse relationship with investor confidence.

Swings in risk appetite may continue to sway USD/CAD as the BoC endorses a wait-and-see approach ahead of 2021, and Governor Tiff Macklem and Co. may stick to the same script at its next meeting on January 20 as the central bank pledges to “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”

It seems as though the BoC will rely on its current tools to support the Canadian economy as the central bank plans to carry out “its QE program until the recovery is well underway and will adjust it as required,” and key market trends may keep USD/CAD under pressure in 2021 as Governor Macklem and Co. acknowledge 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 looks poised to persist as traders have been net-long USD/CAD since mid-May, with the IG Client Sentiment report showing 74.96% of traders still net-long the pair as the ratio of traders long to short stands at 2.99 to 1.

The number of traders net-long is 0.11% higher than yesterday and 7.18% higher from last week, while the number of traders net-short is 5.71% lower than yesterday and 9.77% lower from last week. The decline in net-short position could be a function of profit taking behavior as USD/CAD trades to a fresh yearly low (1.2736), but the tilt in retail sentiment looks poised to persist amid the rise in net-long interests.

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