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Canadian Dollar Forecast: USD/CAD, CAD/JPY Due for Volatility

Canadian Dollar Forecast: USD/CAD, CAD/JPY Due for Volatility

Rich Dvorak, Analyst

CANADIAN DOLLAR PRICE OUTLOOK: USD/CAD, CAD/JPY VOLATILITY TO RISE

  • Canadian Dollar weakened considerably last week as market sentiment deteriorated
  • USD/CAD and CAD/JPY price volatility is expected to accelerate in the week ahead
  • BoC rate decision, BoJ monetary policy update, US inflation data, OPEC+ pose risks

The Canadian Dollar faced selling pressure against key FX peers like the US Dollar and Japanese Yen last week. USD/CAD price action climbed 118-pips on balance while CAD/JPY plunged 165-pips. Canadian Dollar weakness largely tracked a broad-based pullback in risk appetite and deeper unwind of the reflation trade.

Crude oil prices finished nearly -1.0% lower after being down as much as -5.5% mid-week, which weighed negatively on the Loonie due to the typically strong direct relationship between CAD and oil prices. The sharp decline in global bond yields benefited the Yen and helped drive CAD/JPY price action lower.

USD/CAD, CAD/JPY ONE-WEEK IMPLIED VOLATILITY SPIKES AHEAD OF US INFLATION DATA, BOC & BOJ DECISIONS, LINGERING OPEC+ RISK

Canadian Dollar Price Chart USDCAD CADJPY implied volatility one week

Looking to the week ahead, markets are expecting Canadian Dollar volatility to accelerate. This is likely due to high-impact event risk outlined on the DailyFX Economic Calendar faced by USD/CAD and CAD/JPY. In fact, USD/CAD one-week implied volatility of 7.8% ranks in the top 84th percentile of measurements taken over the last three-years and AD/JPY one-week implied volatility of 8.2% is above its 20-day average reading of 6.9%.

The upcoming Bank of Canada rate decision will be at the top of my radar with the BoC poised to further taper its asset purchase program. Slowing QE by more than $1-billion from the current pace of $3-billion could see a bullish reaction by the Canadian Dollar. On the other hand, tapering its asset purchase program by less than $1-billion might disappoint BoC hawks and Canadian Dollar bulls. Not to mention, the ongoing OPEC+ deadlock stands to keep upward pressure on crude oil prices, but headlines on any meeting being set or progress toward a compromise could see selling resume.

That could create headwinds for the Canadian Dollar in turn. Another potential driver of the Canadian Dollar’s direction next week includes the release of US CPI data as this could strongarm USD/CAD price action. Barring a materially hotter-than-expected reading on headline US inflation, traders might look to fade recent US Dollar strength, and the Loonie is positioned as a solid candidate to do this against. Similarly, keeping an eye the BoJ rate decision and yields, particularly interest rate differentials on Canada and Japan government bonds, could help gauge demand for CAD/JPY too.

USD/CAD PRICE CHART: DAILY TIME FRAME (25 DEC 2020 TO 09 JUL 2021)

USDCAD Price Chart Canadian Dollar Forecast

Chart by @RichDvorakFX created using TradingView

USD/CAD price action enjoyed a breakout above descending trendline resistance last week, though the lack of follow-through gives it a lesser degree of credence. This corresponds with the upper Bollinger Band keeping a lid on advances. To that end, the contracting Bollinger Band width speaks to potential for consolidation. Negative divergence on both the MACD and RSI are similarly encouraging technical developments for USD/CAD bears. Traders might look to the 20-day simple moving average and mid-point retracement level of the latest bullish leg if USD/CAD weakness comes into play next week.

If Canadian Dollar selling pressure resumes next week, however, the major currency pair will likely struggle to contend with resistance posed by the 1.2650-price level. This technical obstacle is highlighted by April’s swing high and the underbelly of the 200-day simple moving average. Invalidation of resistance at the 1.2650-price level could unleash a breakout to the upside. Fundamentally speaking, that is a scenario worth considering if US inflation data exceeds forecast, the Bank of Canada delays tapering, and crude oil prices continue facing headwinds.

CAD/JPY PRICE CHART: DAILY TIME FRAME (25 DEC 2020 TO 09 JUL 2021)

CADJPY Price Chart Canadian Dollar Forecast

Chart by @RichDvorakFX created using TradingView

CAD/JPY price action staged a nice rebound to close out a rather rough week for Canadian Dollar bulls. This helped CAD/JPY reclaim its 100-day simple moving average. The Loonie appears to have suffered a technical break of ascending trendline support, but to be fair, the latest stretch of Canadian Dollar weakness looks a bit overdone. This is hinted at by the relative strength index.

Likewise, there is bullish divergence on the MACD. Upward momentum could face pushback near the psychologically-significant 90.000-price level. That said, maintaining the 87.550-price level will likely be key to reduce the odds of a deeper pullback. Failing to defend this support level could expose April’s swing low around 85.650.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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

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