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Canadian Dollar Outlook: USD/CAD, CAD/JPY Eyeing Inflation Data

Canadian Dollar Outlook: USD/CAD, CAD/JPY Eyeing Inflation Data

Daniel Moss, Analyst


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Canadian Dollar, USD/CAD, CAD/JPY, Bank of Canada, Inflation – Talking Points:

  • Equity markets gained ground during APAC trade as investors cheered progress in US fiscal aid talks.
  • Upcoming inflation data may fuel further gains for the Canadian Dollar.
  • USD/CAD rates eyeing a push to fresh yearly lows after slicing through key support.
  • CAD/JPY probing Ascending Triangle resistance. Is a topside break on the cards?

Asia-Pacific Recap

Equity markets gained ground during Asia-Pacific trade as investors mulled progress in US fiscal stimulus negotiations ahead of tonight’s Federal Reserve monetary policy meeting.

Australia’s ASX 200 index rose 0.72% while Japan’s Nikkei 225 index nudged 0.26% higher, as Japanese manufacturing PMI climbed to its highest level since May 2019.

In FX markets, the Euro, Japanese Yen and New Zealand Dollar largely outperformed, while the haven-associated US Dollar continued to lose ground against its major counterparts.

Gold and silver added to yesterday’s gains as yields on US 10-year Treasuries slipped lower, as market participants bank on the Federal Reserve updating guidance on its bond purchasing program at its upcoming meeting.

Looking ahead, the aforementioned FOMC monetary policy meeting will be keenly eyed alongside US retail sales data for the month of November.

Market reaction chart created using Tradingview

Upcoming Inflation Data May Buoy CAD

As mentioned in previous reports, the Canadian Dollar may continue to push higher against its haven-associated counterparts, on the back of positive coronavirus vaccine developments and the Bank of Canada’s wait-and-see approach to monetary policy.

The BoC kept its monetary policy levers steady at its December meeting, after recalibrating its Quantitative Easing (QE) program to “shift purchases toward longer-term bonds” at its meeting in October. The central bank also opted to continuing purchasing “at least $4 billion a week” of Canadian government bonds.

Although Covid-19 cases have surged locally, forcing several Canadian provinces to tighten restrictions, robust fiscal support may continue to keep the BoC on the sidelines for the time being.

Source – Worldometer

Finance Minister Chrystia Freeland unveiled over C$51.7 billion of additional fiscal aid at the end of November, with the measures including an enhanced wage subsidy program – expected to cover up to 75% of payroll costs – and the extension of commercial rent and lockdown support.

Moreover, with local health authorities announcing their approval of Pfizer and BioNTech’s coronavirus vaccine last week, the potential for a more accelerated economic recovery is becoming increasingly likely.

However, BoC Governor Tiff Macklem’s suggestion that the Canadian Dollar’s recent gains are “hurting the competitiveness of Canadian exporters in our largest market” could limit the Loonie’s upside in the near term.

Nevertheless, better-than-expected inflation data for November could see investors dismiss Macklem’s concerns and continue to put a premium on the local currency.

DailyFX Economic Calendar

USD/CAD Daily Chart – Descending Channel Guiding Price Lower

From a technical perspective, the longer-term outlook for USD/CAD rates remains skewed to the downside, as price crashes through key psychological support at 1.2800. However, bullish RSI divergence suggests that the recent downside push may be running out of steam.

A short-term recovery back towards the October 2018 low (1.2783) could be in the offing if support at 1.2700 successfully suppresses selling pressure. Clearing that could open the door for prices to probe confluent resistance at the 21-day moving average and 61.8% Fibonacci (1.2880).

That being said, an extended topside push looks relatively unlikely given prices continue to track within the confines of a Descending Channel and firmly below all four moving averages.

Therefore, failure to gain a firm foothold above 1.2750 would probably allow sellers to regain control of the exchange rate and drive price back towards the monthly low (1.2688). A daily close below likely signalling the resumption of the primary downtrend and bringing support at the 78.6% Fibonacci (1.2653) into focus.

USD/CAD daily chart created using Tradingview

USD/CAD IG Client Sentiment Report

The IG Client Sentiment Report shows 73.30% of traders are net-long with the ratio of traders long to short at 2.74 to 1. The number of traders net-long is 4.88% higher than yesterday and 0.11% higher from last week, while the number of traders net-short is 13.65% lower than yesterday and 6.53% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.

CAD/JPY Daily Chart – Ascending Triangle in Play

CAD/JPY rates may also be at risk of a short-term pullback as price fails to hold above Ascending Triangle resistance and the August high (81.58).

With the RSI dipping back below 60 and the MACD indicator gearing up for a bearish crossover, the path of least resistance seems skewed to the downside.

However, with the moving averages positioned in a bullish sequence – the faster MA’s positioned above their slower counterparts – any potential downside correction may prove short lived.

Nevertheless, prices could begin to probe the support range at 81.00 – 81.10 in the near term if sellers hurdle the December 14 low (81.30), with a break below carving a path for price to test the July high (80.14).

Alternatively, a daily close back above the August high could propel CAD/JPY to test the monthly high (82.12), with a break above probably validating the Ascending Triangle pattern and opening the door for price to test the 61.8% Fibonacci (82.61).

The pattern’s implied measured move suggesting CAD/JPY could climb a further 10% from current levels and exceed the yearly high (84.75) set in February.

CAD/JPY daily chart created using Tradingview

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.