Saturday, July 4

USD/CAD Rate Forecast: RSI on Cusp of Offering Textbook Buy Signal

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Canadian Dollar Talking Points

USD/CAD fills the price gap from Marchas the exchange rate trades to a fresh monthly low (1.3357) following Canada’s Employment report, but the Relative Strength Index (RSI) may offer a textbook buy signal as the oscillator appears to be bouncing back from oversold territory.

USD/CAD Rate Forecast: RSI on Cusp of Offering Textbook Buy Signal

USD/CAD has pushed below the 200-Day SMA (1.3465) for the first time since February as the update to Canada’s Employment report showed an unexpected 289.6K rise in May, while the jobless rate climbed to 13.7% from 13.0% amid projections for a 15.0% print.

The positive development may encourage the Bank of Canada (BoC) to alter the forward guidance at the next meeting on July 15 as the central bank updates the Monetary Policy Report, and Governor Tiff Macklem and Co. may tame speculation for additional monetary support as the “Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations.”

Recent remarks from the BoC suggest the central bank will carry out a wait-and-see approach over the coming months as “any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target,” and Governor Macklem and Co. may change their rune over the coming months as “the Bank expects the economy to resume growth in the third quarter.

In turn, the BoC may continue to rule out a negative interest rate policy as “the Bank’s programs to improve market function are having their intended effect,” and the Canadian Dollar may continue to outperform its US counterpart as the Federal Reserve expands the Main Street Lending Program to allow more small and medium-sized businesses to be able to receive support.”

However, the bearish momentum may abate over the coming days as the Relative Strength Index (RSI) appears to be bouncing back from oversold territory, and the oscillator may offer a textbook buy signal if it crosses above 30.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
  • The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
  • However, the pullback from the yearly high (1.4667) may continue to evolve as USD/CAD takes out the April low (1.3850),and the exchange rate may continue to exhibit a bearish behavior in June as it fills the price gap from March.
  • The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator continues to track the downward trend from May, but the indicator may offer a textbook buy signal over the coming days as it appears to be bouncing back from oversold territory.
  • Nevertheless, the break/close below the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region opens up the Fibonacci overlap around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement), which largely lines up with the March low (1.3315), with the next area of interest coming in around 1.3250 (23.6% expansion).
  • Nevertheless, lack of momentum to hold below the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region may push USD/CAD back towards the overlap around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement), with the next area of interest coming in around 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement).

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— Written by David Song, Currency Strategist

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