Canadian Dollar Rate Forecast Key Takeaways:
- USD/CAD Price Forecast: CAD weakens below 12-month average (1.2800) with backdrop favoring further weakness toward 1.3000
- US Dollar proving to crush the bearish USD consensus trade as yields push higher
- IG UK Client Sentiment Highlight: mixed activity jumps, bias for downside emerges
The Canadian Dollar fell another 65 pips on Wednesday morning against the US Dollar after BoC officials continued to blame NAFTA negotiations for dampening business confidence. While local concerns are always important, much of the driver of USD/CAD and other USD-crosses has been global growth and rising UST yields.
Recently, the rise in the US Treasury 2-year note relative to the Canadian 2-Year has widened to the highest level since the Bank of Canada took a hawkish stance relative to market expectations in summer of 2017. CAD was trading on the wrong side of C$1.35 per USD the last time the spread of US/CA 2-year sovereign yields were this extreme.
CAD Focus Returns To US/CA 2Yr Spread After Dovish BoC
Data source: Bloomberg
Unlock our Q2 forecast to learn what will drive trends for the US Dollar
Markets are approaching month-end that tends to extend recent moves as traders chase the market whereas monthly opening ranges tend to provide a fertile environment for trend changes should they occur.
Looking to correlated markets, WTI crude oil continues to remain below $70/bbl, but fundamental factors favor further strength. Today brings EIA data that has seen a continual decline in US inventories and strong US exports favoring the global growth and tightening physical market narrative. A build of inventories or drop in exports could sour risk sentiment further.
Do you follow WTI crude oil? If so, do check out our popular Oil Forecast
Technical Focus on the Canadian Dollar – USD/CAD Breaks 12-month Average, Looks Higher
The Canadian dollar continues to trade away from prior bullish targets relative to the US Dollar, and has weakened considerably since the Bank of Canada re-emphasized caution in their future rate hike plans. When looking to the options market for insight, you’ll see an elevation in expected volatility at the two-week tenor that includes the FOMC rate decision on May 2 and the US Non-Farm Payroll data. Events like this are critical for determining higher probability trend continuation or reversal moves.
Currently, option premiums for the outsized CAD gains have fallen against the US Dollar to the lowest in a month.
The upside focus for traders as the spot rate sits below 1.2900 is the March 23/22 highs of 1.2940/49 and the psychologically important 1.3000. Support can be found at the April 23 low of 1.2747.
Recently, USD/CAD traded above its 12-month average near 1.2800 and has tended to trade between the one- and two-standard deviation bands around that 12-month average. The bands have a one-standard-deviation up target for the 1-year range at 1.3173 and a one-standard-deviation down target of 1.2411, which is near the 2018 low from early February.
Data source: Bloomberg
USD/CAD 240-Minute Chart: Set to Test Prior Consolidation Top at 1.2950
Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT
Looking at the chart above, it is fair to say that momentum has broken higher and CAD is best left played against very weak currencies like the Japanese Yen, Swiss Franc, or New Zealand Dollar. The Canadian Dollar is losing steam and could continue to do so until major market events of NFP and FOMC give markets something to possibly reprice.
For now, only a break back below 1.2815, the prior consolidation floor above would stop the short-term bullish momentum whereas a break above 1.2950 would cement the immediate view toward and likely above 1.3000. Above 1.30, traders can look to the positive 1-std. deviation level of the 12-month average at 1.3175.
Not familiar with Fibonacci analysis, check out this insightful article
Valuable Insight from IG Client Positioning for USD/CAD: Retail buying activity emerges, biased lower
Data source: IG Client Positioning
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDCAD 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 USDCAD trading bias.
---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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