USD/CAD Rally Eyes Yearly High Ahead of Fed Rate Hike

Canadian Dollar Talking Points

USD/CAD extends the advance from the monthly low (1.2518) to stage a five-day rally, and the exchange rate may continue to retrace the decline from the yearly high (1.3077) as the Federal Reserve is expected to implement higher interest rates on June 15.

USD/CAD Rally Eyes Yearly High Ahead of Fed Rate Hike

USD/CAD trades to a fresh monthly high (1.2975) on the back of US Dollar strength, and the Federal Open Market Committee (FOMC) rate decision may fuel the recent rally in the exchange rate as the central bank is widely expected to deliver another 50bp rate hike.

At the same time, fresh forecasts from Chairman Jerome Powell and Co. may show a higher trajectory for US interest rates as “a restrictive stance of policy may well become appropriate,” and it remains to be seen if the FOMC will alter the forward guidance for monetary policy as the US Consumer Price Index (CPI) climbs to its highest level since 1981.

Source: CME

As a result, more of the same from the FOMC may generate a mixed reaction in the US Dollar as the CME FedWatch Tool now reflects a greater than 90% probability for a 75bp rate hike, and USD/CAD may struggle to retain the advance from the monthly low (1.2518) with the Bank of Canada (BoC) on track to further normalize monetary policy over the coming months.

Until then, USD/CAD may attempt to test the yearly high (1.3077) as it extends the series of higher highs and lows from last week, and a further rise in the exchange rate may continue to alleviate the tilt in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 52.85% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.12 to 1.

The number of traders net-long is 9.53% lower than yesterday and 36.74% lower from last week, while the number of traders net-short is 15.81% higher than yesterday and 54.25% higher from last week. The slump in net-long position comes as USD/CAD climbs to a fresh monthly high (1.2975), while the jump in net-short interest has helped to alleviate the crowding behavior as 66.20% of traders were net-long the pair last week.

With that said, USD/CAD may attempt to test the yearly high (1.3077) if the Fed ramps up its efforts to curb inflation, and a move above 70 in the Relative Strength Index (RSI) is likely to be accompanied by a further advance in the exchange rate like the behavior seen during the previous year.

USD/CAD Rate Daily Chart

Source: Trading View

• USD/CAD carves a series of higher highs and lows following the failed attempt to break/close below the 1.2510 (78.6% retracement) region, with the advance from the monthly low (1.2518) pulling the Relative Strength Index (RSI) out of a downward trend as the oscillator cleared trendline resistance.
• Need a break/close above the 1.2980 (61.8% retracement) region to bring the 1.3030 (50% expansion) to 1.3040 (50% expansion) area on the radar, with a move above 70 in the RSI likely to be accompanied by a further advance in USD/CAD like the price action seen during the previous year.
• A break above the yearly high (1.3077) opens up the 1.3200 (38.2% expansion) handle, with the next area of interest coming in around 1.3290 (61.8% expansion) to 1.3310 (50% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong