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Market update: USD/CAD rally seemingly supported by bearish retail bets


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Canadian dollar heading for worst two-weeks since mid-February; meanwhile, retail traders continue to increase downside exposure and USD/CAD achieves key bullish breakout, but momentum fading.

 

original-size.webpSource: Bloomberg

 

Daniel Dubrovsky | Currency Analyst, DailyFX, San Francisco | Publication date: Thursday 05 October 2023 07:26

The Canadian dollar is heading towards its worst two-week period against the US dollar since the middle of February with USD/CAD up about 1.8% so far. Retail traders have been responding by increasing downside exposure, which can be seen by looking at IG Client Sentiment (IGCS). The latter often functions as a contrarian indicator.

With that in mind, will USD/CAD continue higher from here?

USD/CAD sentiment outlook - bullish

The IGCS gauge shows that only about 27% of retail traders are net-long USD/CAD. Since most of them are biased to the downside, this suggests that prices may continue falling down the road. This is as downside exposure increased by 1.77% and 29.04% compared to yesterday and last week, respectively. With that in mind, the combination of recent changes and overall exposure offers a stronger bullish outlook.

IG client sentiment chart USD/CAD

 

original-size.webpSource: DailyFX

Canadian dollar technical analysis

On the daily chart below, USD/CAD has confirmed a breakout above the key 1.3668 inflection zone. The latter has its beginning from earlier this year, around April. Heading into Thursday’s European trading session, the exchange rate is aiming lower. Recent gains have been occurring alongside negative RSI divergence.

This shows that upside momentum is fading, which can at times precede a turn lower. Still, in September, we saw the 50-day moving average hold as support, maintaining the broader upside focus. It may very well again in the event of a pronounced drawdown. That would place the focus on the 61.8% Fibonacci retracement level of 1.3568. Otherwise, extending higher turns the focus on the March high of 1.3862.

Canadian dollar daily chart

 

original-size.webpSource: TradingView

 

 

 

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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