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Canadian Dollar Technical Analysis: A Quick Trip to Support - Setups in CAD/JPY, USD/CAD

Canadian Dollar Technical Analysis: A Quick Trip to Support - Setups in CAD/JPY, USD/CAD

Christopher Vecchio, CFA, Senior Strategist
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Canadian Dollar Outlook:

  • Post-Fed, plunging commodity prices are weighing down growth-sensitive currencies like the Canadian Dollar.
  • USD/CAD’s acute rally to descending channel resistance suggests that an inflection point nears – as does CAD/JPY’s pullback.
  • According to the IG Client Sentiment Index, USD/CAD rates have a near-term bullish bias.

F.R.E.A.M.

The Federal Reserve rules everything around markets – just ask the Canadian Dollar. Even though the Bank of Canada has drawn a significant hawkish distinction between itself and other central banks in recent months, all it took were a few dots to provoke traders to dump the Loonie en masse. Coupled with the late-session pullback in oil prices, the Canadian Dollar’s wings have been clipped. The question is, just how badly?

Now, in the wake of the June Fed meeting, the Canadian Dollar is testing significant levels of support (support in CAD/JPY, resistance in USD/CAD) that suggests an inflection point is nearby: either the Loonie will regain technical posture from this point forward; or a more significant technical breakdown could be afoot.

CAD/JPY Rate Technical Analysis: Daily Chart (February 2020 to June 2021) (Chart 1)

Canadian Dollar Technical Analysis: A Quick Trip to Support - Setups in CAD/JPY, USD/CAD

In a prior update, it was noted that “CAD/JPY rates 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.” However, after several weeks of sideways action, CAD/JPY rates are testing the aforementioned descending trendline; failure below this level would suggest the recent effort higher was a false bullish breakout attempt.

But that wouldn’t necessarily indicate that potential for more gains are out the window. Should CAD/JPY rates lose trendline support, a pullback towards the March high at 88.31 – which coincides with the rising trendline from the January and April swing lows – could develop before price action settles prior to attempting another drive higher.

USD/CAD Rate Technical Analysis: Daily Chart (June 2020 to June 2021) (Chart 2)

Canadian Dollar Technical Analysis: A Quick Trip to Support - Setups in CAD/JPY, USD/CAD

USD/CAD rates quickly accelerated towards their March low (1.2365) following the break of the sideways range that formed from early-May and mid-June. The equidistant measured move of the range suggested USD/CAD could rally towards 1.2370; the high came in today at 1.2374. Coupled with resistance in the descending channel in place since November 2020 coming in play between 1.2350 and 1.2400 for the remainder of June, there is nascent technical evidence that the USD/CAD rally may be capped from here.

Yet the threat for a more significant move higher remains. In breaching the descending channel resistance, USD/CAD rates would have a fairly clear path towards the April swing high at 1.2654.

IG Client Sentiment Index: USD/CAD Rate Forecast (June 17, 2021) (Chart 3)

Canadian Dollar Technical Analysis: A Quick Trip to Support - Setups in CAD/JPY, USD/CAD

USD/CAD: Retail trader data shows 67.79% of traders are net-long with the ratio of traders long to short at 2.10 to 1. The number of traders net-long is 32.16% lower than yesterday and 28.01% lower from last week, while the number of traders net-short is 0.43% lower than yesterday and 14.21% 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.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse higher despite the fact traders remain net-long.

--- 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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