USD/CAD Rate Defends February Opening Range Ahead of US CPI Report

Canadian Dollar Talking Points

USD/CAD preserves the opening range for February after giving back the bullish reaction to the better-than-expected Non-Farm Payrolls (NFP) report, but the update to the US Consumer Price Index (CPI) may influence the near-term outlook for the exchange rate as inflation is expected to increase for the fifth consecutive month.

USD/CAD Rate Defends February Opening Range Ahead of US CPI Report

USD/CAD appears to be stuck in a defined range following the failed attempt to test the January high (1.2814), and the exchange rate may continue to track sideways over the near-term as both the Bank of Canada (BoC) and Federal Reserve prepare to implement higher interest rates in 2022.

Nevertheless, fresh figures coming out of the US economy may prop up USD/CAD as the CPI is expected to increase to 7.3% from 7.0% per annum in December, which would mark the highest reading since 1982, and another uptick in the index may put pressure on the Federal Open Market Committee (FOMC) to normalize monetary policy sooner rather than later as the central bank unveils a more detailed exit strategy.

Evidence of stronger inflation may lead to a further shift in the FOMC’s forward guidance for monetary policy as the committee also plans to wind down the balance sheet later this year, and it remains to be seen if Chairman Jerome Powell and Co. will project a steeper path for the Fed Funds rate as the central bank is slate to release the updated Summary of Economic Projections (SEP) at its next interest rate decision on March 16.

Until then, USD/CAD may track the yearly range amid the string of failed attempt to test the January high (1.2814), but the tilt in retail sentiment looks poised to persist as trades have been net-long the pair since late-December.

The IG Client Sentiment report shows 67.15% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 2.04 to 1.

The number of traders net-long is 11.98% higher than yesterday and 19.87% higher from last week, while the number of traders net-short is 3.68% lower than yesterday and 13.88% lower from last week. The rise in net-long interest has fueled the crowding behavior as 59.49% of traders were net-long USD/CAD last week, while the decline in net-short position comes as the exchange rate appears to be defending the opening range for February.

With that said, the decline from the December high (1.2964) may turn out to be a near-term correction if USD/CAD manages to clear the monthly opening range, but lack of momentum to test the January high (1.2814) may keep the exchange rate within a defined range as both the BoC and FOMC prepare to shift gears.

USD/CAD Rate Daily Chart

Source: Trading View

• Keep in mind, USD/CAD traded to a fresh 2021 high (1.2964) in December even as the Relative Strength Index (RSI) diverged with price, but the exchange rate appears to be stuck in a defined range amid the string of failed attempts to test the January high (1.2814).
• USD/CAD appears to be defending the opening range for February as it bounces back ahead of last week’s low (1.2650), but need a close above the 1.2770 (38.2% expansion) region to raise the scope for another run at the January high (1.2814).
• Next area of interest comes in around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) followed by the Fibonacci overlap around 1.2980 (61.8% retracement) to 1.3030 (50% expansion), which entails the December 2020 high (1.3009).
• At the same time, failure to hold above the overlap around 1.2620 (50% retracement) to 1.2650 (78.6% expansion) may push USD/CAD towards the 1.2510 (78.6% retracement) region, with the break of the January low (1.2450) opening up the 1.2410 (23.6% expansion) to 1.2440 (23.6% expansion) area.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong