USD/CAD Rebound Unravels as Fed Balance Sheet Approaches Record High (2024)

Canadian Dollar Talking Points

USD/CAD pares the advance from the yearly low (1.2928) as the US Dollar weakens against commodity bloc currencies, which includes the Australian Dollar along with the New Zealand Dollar, and the Canadian Dollar may continue to appreciate against the Greenback as the exchange rate snaps the series of higher highs and lows from the previous week.

USD/CAD Rebound Unravels as Fed Balance Sheet Approaches Record High

USD/CAD gives back the rebound following the US election even though the Bank of Canada (BoC) warns of a protracted recovery, and key market trends may keep the exchange rate under pressure as the Federal Reserve

In a recent speech, BoC Senior Deputy GovernorCarolyn Wilkinsstates that “COVID-19 will leave anunfortunate economic legacy through its impacts on investment, the work force and productivity,” and warns of “a situation where Canada is likely to exit the pandemic with a lower profile for potential output.”

It remains to be seen if the BoC will take additional steps at its last meeting for 2020 after recalibrating its quantitative easing (QE) program in October “to shift purchases towards longer-term bonds,” and Governor Tiff Macklem and Co. may largely endorse a wait-and-see approach on December 9 as the central bank pledges to retain its non-standard measure “until the recovery is well underway.”

Source: FOMC

As a result, key market trends may carry into the end of the year as the Federal Reserve’s balance sheet approaches the record high ($7.177 trillion), with the figure increasing to $7.175 trillion in the week of November 9 from $7.158 trillion the week prior, and it seems as though the Federal Open Market Committee (FOMC) is in no rush to scale back its emergency tools as St. Louis Fed President James Bullard insists that “from a market perspective, the key idea has been the Fed is willing and able to act as a backstop to these various markets” while speaking on a virtual conference call.

In turn, swings investor confidence may continue to influence USD/CAD as the FOMC vows to “increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace,” and it seems as though the tilt in retail sentiment will also persist ahead of 2021 as traders have been net-long the pair since mid-May.

The IG Client Sentiment report shows 62.18% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.64 to 1.The number of traders net-long is 0.94% higher than yesterday and 22.73% lower from last week, while the number of traders net-short is 52.92% higher than yesterday and 107.94% higher from last week.

The jump in net-short position has done little to alleviate the tilt in retail sentiment as 54.87% of traders were net-long USD/CAD at the end of October, while the decline in net-long position could be a function of profit-taking behavior as the exchange rate snaps the series of higher highs and lows from the previous week.

With that said, key market trends may continue to influence USD/CAD over the remainder of the month as the reserve currency reflects an inverse relationship with investor confidence, and the exchange rate may continue the give back the advance from the yearly low (1.2928) as the US Dollar weakens against commodity bloc currencies.

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.
• USD/CAD managed to track the June range throughout July as the RSI broke out of a downward trend, but the failed attempt to push back above the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region led to a break of the March/June low (1.3315) even though the momentum indicator failed to push into oversold territory.
• The decline from the August high (1.3451) briefly pushed the RSI below 30, but lacked the momentum to produce a test of the January low (1.2957) as the indicator failed to reflect the extreme reading in June.
• In turn, the advance from the September low (1.2994) pushed USD/CAD above the 50-Day SMA (1.3201) for the first time since May, but the exchange rate reversed coursed following the failed attempt to test the August high (1.3451), which largely lines up with the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region.
• A similar scenario took shape in October as USD/CAD tracked the September range, but the exchange rate cleared the January low (1.2957) following the US election to trade to a fresh 2020 low (1.2928), but lack of momentum to close below the 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement) has pushed USD/CAD up against the 1.3170 (38.2% expansion).
• However, USD/CAD has slipped back below the 1.3110 (50% expansion) as it snaps the series of higher highs and lows from the previous week, with a break/close below the Fibonacci overlap around 1.3030 (50% expansion) to 1.3040 (61.8% expansion) bringing the 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong