USD/CAD Eyes 2021 High with US CPI on Tap

Canadian Dollar Talking Points

USD/CAD clears the February high (1.2878) as it extends the series of higher highs and lows from the monthly low (1.2587), and fresh data prints coming out of the US may fuel the recent advance in the exchange rate as the Consumer Price Index (CPI) is expected to increase for the sixth consecutive month.

Canadian Dollar Forecast: USD/CAD Eyes 2021 High with US CPI on Tap

USD/CAD trades to a fresh yearly high (1.2901) after reversing ahead of the 200-Day SMA (1.2578), and the exchange rate may continue to retrace the decline from the 2021 high (1.2964) as the US Dollar appreciates on the back of the Russia-Ukraine war.

At the same time, the update to the CPI may fuel a further advance in USD/CAD as the headline reading is expected to increase to 7.9% from 7.5% in February, which would mark the highest reading since 1982, with the core rate of inflation anticipated to show a similar dynamic.

Evidence of persistent inflation may keep the Federal Reserve on track to normalize monetary policy over the coming months, and it remains to be seen if Chairman Jerome Powell and Co. will adjust its exit strategy at the next interest rate decision on March 16 as the central bank is slated to released the updated Summary of Economic Projections (SEP).

Until then, developments coming out of the US may keep USD/CAD afloat as the Federal Open Market Committee (FOMC) prepares to shift gears, and a further appreciation in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen during the previous year.

The IG Client Sentiment report shows 46.28% of traders are currently net-long USD/CAD, with the ratio of traders short to long standing at 1.16 to 1.

The number of traders net-long is 11.40% lower than yesterday and 37.17% lower from last week, while the number of traders net-short is 20.57% higher than yesterday and 41.69% higher from last week. The decline in net-long position could be a function of profit-taking behavior as USD/CAD extends the series of higher highs and lows from last week, while the jump in net-short interest has fueled the flip in retail sentiment as 60.77% of traders were net-long the pair last week.

With that said, the update to the US CPI may fuel the bullish price action in USD/CAD as consumer prices are expected to increase for the sixth consecutive month, and the exchange rate may continue to retrace the decline from the 2021 high (1.2964) as market participants brace for an imminent shift in Fed policy.

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, with the exchange rate clearing the 2022 opening range in February as it traded to a fresh yearly high (1.2878).
• USD/CAD now clears the February high (1.2878) after reversing ahead of the 200-Day SMA (1.2582), with the break/close Fibonacci overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) bringing the 2021 high (1.2964) on the radar.
• A move above the 1.2980 (61.8% retracement) region opens up the 1.3030 (50% expansion) to 1.3040 (50% expansion) region, with the next area of interest coming in around the 1.3200 (38.2% expansion) handle.
• However, lack of momentum to test the 2021 high (1.2964) may push USD/CAD back below the overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion), with failure to hold above the 1.2770 (38.2% expansion) region bringing the 1.2620 (50% retracement) to 1.2650 (78.6% expansion) region area back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong