Canadian Dollar Rate Forecast: Loonie Strength Emerges On Soft USD
Canadian Dollar Rate Forecast Key Takeaways:
- The ONE Thing: Are the CAD bulls listening? The time may be right for further CAD strength to emerge. At May’s open, Governor Poloz came out with hawkish comments that seems slow to be priced in as Governor Poloz noted that ‘interest rates are heading higher’ and ‘forces in the economy suggest not the time to be at neutral.’ Hawkish indeed.
- Canadian Dollar rate forecast favors further CAD strength on the break below support at the 55-day moving average at 1.2829 and the May 2 low at 1.2803 with resistance at the May 4 high of 1.2918.
- Canadian Employment data on Friday could give the CAD bull’s something to add to their recent victories. Further support at 1.2723, 38.2% Fibonacci level.
- IG UK Client Sentiment Highlight: changes in sentiment warn that the current USDCAD price trend may soon reverse lower.
A strong Candian Dollar is emerging on the back of elevated crude oil prices and a weakening US Dollar on a soft CPI print for April. Now, the focus will turn to the US/CA 2Yr yield differentials to see if the CAD can make up even more ground.
The key risk to further CAD strength appears to be overconfidence on a successful outcome to NAFTA talks and potentially rich pricing in of a May rate hike.
A Stretched 2-Year Yield Differential May Favor CAD Strength On Recent BoC Comments
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The chart above is one USD/CAD traders, or at least attendees of FX Closing Bell should be familiar with. It shows the US-Canada 2-year yield gap, which has recently favored the US and as such USD/CAD bullishness.
What a trader should note is that we may be reaching the outer bands at a time when the market is questioning how aggressive the Federal Reserve will be over the two-year horizon. The yield-gap (blue area) is pushing into 52-week extremes, and a retraction of the yield gap could further lift CAD.
May 10 Strong/Weak G8 FX Dashboard
Data source: Bloomberg
The strong/weak table above that I also share on FX closing bell helps to visualize where there is broad strength in the FX market. Currently, the strongest currency is the Canadian dollar based on an equally weighted 5-day % change with the US Dollar as a close second. The weakest currency after the RBNZ and their new Governor Orr provided a message of patience is the New Zealand Dollar.
Key Levels In Focus on USD/CAD
Data source: Bloomberg
The dash-board above gives traders a range of key levels and insight on USD/CAD. 3-key insights are the Volatility band range, which takes an upper and lower 2-std. deviation range of the 20-DMA.
Second, the 30-day range is helpful for traders to grasp how much movement has occurred from high to low in the last 30-days. The third point, before painting out the levels is the relation of spot to the 20-DMA. 100% means that spot is equal to the 20-day moving average.
A negative number means the price currency or CAD is strong relative to the 20-DMA and the US Dollar is weak relative to the 20-DMA. As such, the rate is trading below the USD/CAD 20-DMA at 1.2787.
The S1,S2, & S3 and R1,RS, & R3 help you see what levels are in focus based on recent and implied volatility. RS/S1 are the high and low of the current trading session while R2 & R3 are the 1- & 2-upper standard deviation level of the 1-week forward. S2 & S3 are the 1- & 2-lower standard deviation level of the 1-week forward. It may seem a bit quantitative, but the idea is to understand what levels should be watched based on recent volatility and expected volatility in the direction of the predominant trend.
Chart Focus on the Canadian Dollar – Was That a Bull Trap?
Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT
USD/CAD traders may have just witnessed a bear trap. In short, what appeared to be a breakout of a multi-week range between 1.28-1.29 was quickly reversed with a move back below the May opening range low of 1.2803.
Price had appeared wedged between clean support at C$1.2803 and resistance at C$1.29 per USD. However, a swift move higher to C$1.2999 that was reversed provides swing traders with a strong resistance point to build a CAD long bias from. However, the US Dollar remains strong, so if CAD strength persists, GBP/CAD or EUR/CAD may be better plays.
Bearish targets currently sit at C$1.2628 and C$1.2400 as Fibonacci Expansion targets.
Not familiar with Fibonacci analysis, check out this insightful article
Valuable Insight from IG Client Positioning for USD/CAD: Retail selling activity drops, biased lower
Data source: IG Client Positioning
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USDCAD price trend may soon reverse lower despite the fact traders remain net-short (emphasis mine.)
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Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer a excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.
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---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
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