USD/CAD Climbs Back Above 50-Day SMA Ahead of US CPI

Canadian Dollar Talking Points

USD/CAD trades back above the 50-Day SMA (1.3524) as it rebounds from a fresh monthly low (1.3387), but the exchange rate may struggle to hold above the moving average as the US Consumer Price Index (CPI) is anticipated to show slowing inflation.

USD/CAD Climbs Back Above 50-Day SMA Ahead of US CPI

USD/CAD failed to defend the October low (1.3496) as Canada’s Employment report showed the economy adding 108.3K jobs in October, and the exchange rate may face a further pullback ahead of the next Bank of Canada (BoC) meeting on December 7 as the development puts pressure on Governor Tiff Macklem and Co. to carry the hiking-cycle into 2023.

At the same time, data prints coming out of the US may drag on USD/CAD as the both the headline and core CPI are expected to downtick in October, and signs of easing price growth may push the Federal Reserve to adjust its approach in combating inflation as the central bank tries to achieve a soft-landing for the economy.

As a result, USD/CAD may no longer respond to the positive slope in the 50-Day SMA (1.3524) as it trades below the moving average for the first time since August, but a stronger-than-expected CPI report may fuel the rebound from the monthly low (1.3387) as puts pressure on the Federal Open Market Committee (FOMC) it implement another 75bp rate hike at its last meeting for 2022.

In turn, USD/CAD may continue to retrace the decline from the monthly high (1.3808) as trades back above the moving average, and a further advance in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment (IGCS) report shows 44.61% of traders are currently net-long USD/CAD, with the ratio of traders short to long standing at 1.24 to 1.

The number of traders net-long is 14.22% lower than yesterday and 16.09% higher from last week, while the number of traders net-short is 5.54% higher than yesterday and 8.04% higher from last week. The rise in net-long interest has helped to alleviate the crowding behavior as 35.70% of traders were net-long USD/CAD last week, while the rise in net-short position comes as the exchange rate rebounds from a fresh monthly low (1.3387).

With that said, the update to the US CPI may undermine the recent rebound in USD/CAD should the data print boost bets for a smaller Fed rate hike in December, but the exchange rate may track the positive slope in the 50-Day SMA (1.3524) as it trades back above the moving average.

USD/CAD Rate Daily Chart

Source: Trading View

• USD/CAD initiates a series of higher highs and lows following the failed attempt to close below the 1.3400 (23.6% expansion) handle, with a close above 1.3540 (23.6% retracement) bringing the 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion) region back on the radar.
• In turn, USD/CAD may track the positive slope in the 50-Day SMA (1.3524) as it trades back above the moving average, with a break/close above the 1.3800 (161.8% expansion) handle raising the scope for a run at the yearly high (1.3978).
• However, USD/CAD may no longer respond to the moving average if it struggles to close above 1.3540 (23.6% retracement), with a move below the 1.3460 (61.8% retracement) area bringing the 1.3400 (23.6% expansion) handle back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong