USD/CAD: downtrend at risk post BoC on rising net-short bets

USD/CAD net-short positioning and fading downside momentum are undermining CAD strength versus the US dollar after July’s Bank of Canada 1.75% rate hold.

Canadian dollar, USD/CAD, IG client positioning talking points

  • Rising USD/CAD net-short positioning undermining downtrend
  • Fading momentum hints more confirmation needed under $1.3069
  • Canadian dollar may look past soft CPI data for external risks

Canadian dollar IG client sentiment outlook - bullish

After experiencing the best month against the US dollar since January, risks for the Canadian dollar appear to be tilting to the downside. Accompanying the over 3.4% decline in USD/CAD last month was an uptick in Canadian dollar net long positioning, indicated by IG client sentiment (IGCS) on the first chart below. At one point, roughly 67% of loonie traders were biased to the upside.

Since then, changes in positioning warn that the current USD/CAD price trend may soon reverse higher despite the fact that traders remain net long. We typically take a contrarian view to crowd sentiment, meaning that since traders are net long suggests that USD/CAD prices may continue their path lower. From a psychological perspective, this points to traders attempting to pick where the loonie may bottom.

However, this is occurring at a decreasing pace. The number of traders net short as of July 15 is 17.5% and 50% higher compared to July 12 and a week ago respectively. If traders resume adding exposure to USD/CAD longs, the outlook could shift bearish again.

USD/CAD client positioning

USD/CAD technical analysis - downtrend momentum fading?

USD/CAD finds itself attempting to extend the dominant downtrend from June. Its decline was initiated via a shooting star after prices peaked at $1.3565. With confirmation via further closes to the downside, that candlestick pattern can mark turning points in uptrends. In this case, it was the one that took USD/CAD from $1.3069 in February to the 31st May peak after an inverse head and shoulders pattern.

Now, the February low gave way as support at $1.3069. Confirming further daily closes to the downside opens the door to setting new 2019 lows. In such a scenario, levels of support may bring declines to a pause at $1.2982, $1.2888 and $1.2783. Those are lows that formed back in August and September 2018. However, positive relative strength index (RSI) divergence is present and this shows fading momentum to the downside.

At times, this can precede a reversal or translate into consolidation. In the event of a turn higher, the pair could come across what appears to be potential descending resistance (parallel pink lines on the chart below). Clearing them exposes former support, a range between $1.3251 and $1.3291. That could reinstate itself as resistance, creating a challenge to reverse the dominant downtrend that took USD/CAD over 3.8% lower since June.

USD/CAD daily chart

Canadian dollar fundamentals – post BoC

Taking a look at Canadian dollar fundamentals helps to explain its impressive performance against the greenback as of late. On the next chart below, we can see that gains in Canadian dollar occurred alongside continued outperformance in Canadian economic data outcomes relative to economists’ expectations. This is shown via the Citi Economic Surprise Index that tracks Canada.

This is as opposed to deteriorating results from the United States, China and even Australia. While this has helped to fuel aggressive US Federal Reserve (Fed), People's Bank of China (PBOC) and Reserve Bank of Australia (RBA) interest rate cut expectations, those tracing what the Bank of Canada (BoC) might do next have softened. This is indicated via the red line on the chart below, which looks at where the BoC may take rates by year end as implied by local bank bill futures.

At July’s interest rate decision, the BoC left rates unchanged as expected at 1.75% without hinting of an imminent cut on the horizon. Policymakers deemed the setting of where they currently are as 'appropriate'. While they envision inflation returning to target by mid-2020, they noted that downside risks include trade conflicts as they keep a close eye on upcoming data.

As such, a disappointment in June’s inflation report may do little to fuel BoC rate cut bets this year as policymakers anticipate a temporary dip in consumer price index (CPI) ahead on temporary factors such as gasoline prices. The fundamental focus for the Canadian dollar may likely remain on external risks such as global growth fears pushing down crude oil prices and the potential of US dollar gains should a premium for liquidity arise.

Canadian dollar trading resources

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Start trading forex today

Trade the largest and most volatile financial market in the world.

  • Spreads start at just 0.6 points on EUR/USD
  • Analyse market movements with our essential selection of charts
  • Speculate from a range of platforms, including on mobile

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
liveprices.javascriptrequired
liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.