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Canadian Dollar Forecast: Declining Infections, Oil Prices to Buoy CAD

Canadian Dollar Forecast: Declining Infections, Oil Prices to Buoy CAD

Daniel Moss, Analyst


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Canadian Dollar, CAD/JPY, USD/CAD, Crude Oil, Coronavirus Infections – Talking Points:

  • The US Dollar continued to lose ground during APAC trade after last night’s underwhelming CPI figures.
  • Falling Covid-19 cases and resilient oil prices may underpin the Canadian Dollar.
  • CAD/JPY poised to extend recent gains while USD/CAD is eyeing a push to retest the yearly low.

Asia-Pacific Recap

Equity markets broadly gained during Asia-Pacific trade as market participants continued to anticipate the provision of additional fiscal aid out of the US. S&P 500 futures climbed 0.135%, Dow Jones futures rose 0.2% and Nasdaq futures nudged 0.1% higher. At the same time, Japan’s Nikkei 225 slipped 0.4% lower, alongside Australia’s ASX 200.

In FX markets, the risk-sensitive AUD, NZD, CAD and NOK outperformed, while the haven-associated USD, JPY and CHF lost ground against their major counterparts. Gold held relatively steady and silver prices nudged marginally higher despite yields on US 10-year treasuries climbing just shy of 3 basis points.

Looking ahead, US jobless claims data and the Federal Reserve’s monetary policy report headline the economic docket alongside the Bank of Mexico’s (Banxico) interest rate decision.

DailyFX Economic Calendar

Resilient Oil Prices, Falling Case Numbers to Buoy CAD

Canada’s notable drop in coronavirus infections , in tandem with resilient oil prices, may open the door for the local currency to gain ground against its haven-associated counterparts in the coming weeks. The 7-day moving average tracking Covid-19 cases has fallen by over 50%, since peaking on January 8 at 8,885.

Indeed, these positive health developments seem to have bolstered local sentiment, with Canada’s Economic Mood Index hovering at pre-pandemic highs.

This may open the door for the Bank of Canada to tighten its monetary policy settings sooner-than-expected, given Governor Tiff Macklem’s comments that “as much as bold policy response is needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road”.

Source – Worldometer

Moreover, crude oil’s recent surge to its highest levels in over a year will likely support the commodity-sensitive Canadian Dollar. Backwardation of the oil futures curve hints at strong near-term demand, with the spread between the March 2021 and March 2022 contracts widening substantially. Additional output cuts from Saudi Arabia may also prop up prices.

Therefore, it appears that the current fundamental backdrop could favour the cyclically-sensitive Loonie, and pave the way for further gains against the Japanese Yen and US Dollar.

Crude oil, CAD/JPY comparison chart created using Tradingview

CAD/JPY Daily Chart – 2014 Trend Break Hints at Gains

From a technical perspective, CAD/JPY appears poised to extend its recent surge to post-crisis highs, after penetrating the downtrend extending from the 2014 highs and surging away from the trend-defining 55-day exponential moving average (81.36).

With the RSI pushing back above 60, and the MACD tracking firmly above its neutral midpoint, the path of least resistance seems higher.

A daily close above the 61.8% Fibonacci (82.61) would probably signal the resumption of the primary uptrend and propel price to challenge psychological resistance at 84.00.

Alternatively, sliding back below range support at 82.05 – 82.15 could trigger a pullback to the psychologically pivotal 81.00 mark.

CAD/JPY daily chart created using Tradingview

USD/CAD Daily Chart – Eyeing a Retest of Yearly Lows

USD/CAD rates seem to be eyeing a push to retest the yearly low, after failing to break above the 55-EMA (1.2813).

With both the MACD and RSI diving back below their respective neutral midpoints, further losses appear likely in the near term.

Breaching the February 11 low (1.2668) would likely trigger a downside push to challenge the yearly low (1.2589), with a daily close below needed to signal the resumption of the primary downtrend.

Alternatively, a push back above 1.2700 could open the door for buyers to drive the exchange rate back towards range resistance at 1.2755 – 1.2770.

USD/CAD daily chart created using Tradingview

IG Client Sentiment Report

The IG Client Sentiment Report shows 72.45% of traders are net-long with the ratio of traders long to short at 2.63 to 1. The number of traders net-long is 7.46% higher than yesterday and 7.71% higher from last week, while the number of traders net-short is 6.32% lower than yesterday and 10.33% 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.

-- 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.