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Weekly Canadian Dollar Technical Forecast: Is the Rally Long in the Tooth?

Weekly Canadian Dollar Technical Forecast: Is the Rally Long in the Tooth?

Christopher Vecchio, CFA, Senior Strategist
Weekly Canadian Dollar Technical Forecast: Is the Rally Long in the Tooth?

Technical Forecast for the Canadian Dollar: Neutral

  • The Canadian Dollar has been on an absolute tear in 2021, thanks in part to rising energy prices. Yet gains have been harder to come by over the past week-plus.
  • A reversal higher by USD/CAD rates could be the canary in the coal mine for a deeper setback for the Canadian Dollar elsewhere.
  • The IG Client Sentiment Index suggests that the Canadian Dollar has a mixed bias in the near-term.

Canadian Dollar Rates Week in Review

The last week of May proved a mixed bag for the Canadian Dollar, with four CAD-crosses seeing Loonie weakness (EUR/CAD, GBP/CAD, NZD/CAD, and USD/CAD) and three seeing strength (AUD/CAD, CAD/CHF, and CAD/JPY).

The lack of significant Canadian Dollar strength in an environment that otherwise seemed very supportive may prove concerning: oil prices are back near their yearly highs (the oil sector represents 11% of the Canadian economy); Canada’s vaccination program has improved (now has a greater % of adults vaccinated than the US); and Canada’s largest trading partner has seen economic momentum improve (20% of Canadian GDP can be tied to the US).

Even if the fundamental argument for the Canadian Dollar remains robust, the fact of the matter is that a lack of technical follow-through leaves the Loonie exposed for potential weakness. Given the situation in the futures market, whereby traders are the most net-long the Canadian Dollar since November 2009, it may simply be the case that the rally is long in the tooth. Were it to develop, consolidation, if not weakness, in the CAD-crosses shouldn’t be a surprise moving forward.

USD/CAD RATE TECHNICAL ANALYSIS: DAILY CHART (May 2020 to May 2021) (CHART 1)

Weekly Canadian Dollar Technical Forecast: Is the Rally Long in the Tooth?

USD/CAD rates set a fresh yearly low in the middle of May, but for the past two weeks have been trading sideways. The lack of progress may be discouraging to bears, but there are small technical hints that suggest downside pressure remains robust. USD/CAD rates remain below both the descending trendline from the March and November 2020 highs, the pandemic downtrend, as well as former descending channel support between November 2020 and early-May 2021, now acting as resistance.

While USD/CAD rates are still fully below their daily EMA envelope, which is in bearish sequential order, both daily MACD and daily Slow Stochastics have been relieved of their extreme oversold conditions despite no concurrent improvement in price action. The evidence is accumulating that USD/CAD rates are carving out a bear flag over the past few weeks, pointing to more downside throughout June.

And due to the aforementioned fundamentals bonafides coupled with a still-bearish technical outlook, USD/CAD has become a potent leading indicator for the entire CAD-crosses complex. If USD/CAD rates are not able to continue their drive lower and instead begin to post a reversal higher, it would give greater credence to a short covering rally in the futures market; all CAD-crosses may suffer in an environment where USD/CAD rates are rising.

IG Client Sentiment Index: USD/CAD RATE Forecast (May 28, 2021) (Chart 2)

Weekly Canadian Dollar Technical Forecast: Is the Rally Long in the Tooth?

USD/CAD: Retail trader data shows 81.36% of traders are net-long with the ratio of traders long to short at 4.36 to 1. The number of traders net-long is 2.41% lower than yesterday and 1.92% higher from last week, while the number of traders net-short is 15.05% lower than yesterday and 4.64% higher 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.

Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

CAD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (May 2020 to May 2021) (CHART 3)

Weekly Canadian Dollar Technical Forecast: Is the Rally Long in the Tooth?

In a previous update it was noted that “it appears that price action in April was merely a temporary setback before CAD/JPY continues its rally towards the descending trendline from the October 2007 (all-time high) and December 2014 highs, coinciding with 89.22, the 100% Fibonacci retracement of the 2018 high/2020 low range.” CAD/JPY rats have traded higher through the descending trendline from the October 2007 (all-time high) and December 2014 highs, jumping to their highest level since November 2015 suggesting that a multi-year bottoming effort has begun.

CAD/JPY rates may have the clearest path for more CAD strength in the near-term. The pair is above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is rising again while above its signal line, while daily Slow Stochastics have started to rise back into overbought territory. The path of least resistance appears higher, for now; given the longer-term technical considerations, a ‘buy the dip’ approach seems appropriate.

EUR/CAD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to May 2021) (CHART 4)

Weekly Canadian Dollar Technical Forecast: Is the Rally Long in the Tooth?

EUR/CAD rates have had a bearish bias for much of 2021, but the reality is that May produced little significant direction, one way or the other. The pair has been trading choppily above ascending trendline support from the August 2012 and February 2020 lows, which comes closer to 1.4600/50, as well as the 76.4% Fibonacci retracement of the 2020 high/low range at 1.4674.

The pair has continued to consolidate into a multidecade symmetrical triangle dating back to the December 2008 and March 2020 highs, which in reality can be drawn even further back to the implied EUR/CAD rate at the March 1995 high. We need to see either a drop below 1.4600 or gains through 1.4926 (61.8% Fibonacci retracement of 2020 high/low range) before the next directional bias can be ascertained.

CFTC COT Canadian Dollar Futures Positioning (May 2020 to May 2021) (Chart 5)

Weekly Canadian Dollar Technical Forecast: Is the Rally Long in the Tooth?

Finally, a consideration of positioning in the futures market. According to the CFTC’s COT for the week ended May 25, speculators slightly decreased their net-long Canadian Dollar positioning to 44.8K contracts, down from the 46.1K net-long contracts held in the week prior. The futures market is now the most net-long Canadian Dollar since November 2019.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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