USD/CAD: Canadian dollar sentiment hints at downside

USD/CAD summary points

• The Canadian dollar looks set to extend its drop against the US dollar after disappointing Canada jobs data and lower expectations for Fed rate cuts
• USD/CAD client sentiment reveals a surge in net-longs which could be supportive of uptrend continuation
• Sharpen your knowledge on forex trading here

Forex traders are turning increasingly bearish on the Canadian dollar judging by the latest shift in spot USD/CAD client sentiment data from IG. The Canadian dollar has benefited at the expense of the US dollar since early June owing to lofty Federal Reserve (Fed) rate cut bets and a relatively firm stance on monetary policy by the Bank of Canada (BoC).

Now, the recent trend is showing signs of reversing back higher, however, with markets beginning to unwind expectations for the Fed to cut rates while raising the probability of a dovish pivot by the BoC in the near future.

Spot USD/CAD price chart: daily time frame (9 April – 13 August 2019)

Spot USD/CAD bulls will likely watch for prices to hold the short-term uptrend line forming from the series of higher lows since 18 July. Yet, technical confluence around the $1.33 handle looks to pose as an area of resistance that could keep upward price action at bay. That said, spot USD/CAD price action could easily continue marching higher if a breakout above the currency pair’s bearish trendline extended from the intraday highs on 31 May and 7 August can be confirmed. Additionally, the upward sloping exponential moving averages (EMA) envelope could provide a positive tailwind for USD/CAD bulls.

USD/CAD - IG client sentiment index price chart: daily time frame (14 February – 13 August 2019)

USD/CAD traders adding heavily to long positions

According to IG client sentiment data, spot USD/CAD retail forex traders are adding heavily to long positions but remain net-short on balance. In fact, the latest client sentiment data shows that 48.4% of traders are net-long resulting in a short to long ratio of -1.07 to 1.

Also, the number of traders net-long is 53.8% higher relative to last week whereas the number of traders net-short is 16% lower over the same period. Consequently, the change in spot USD/CAD trader positioning hints at higher prices in the near term despite crowd sentiment typically looked at through the lens of a contrarian.