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Canadian Dollar Technical Analysis: Deeper Setbacks Emerging - Setups in CAD/JPY, USD/CAD

Canadian Dollar Technical Analysis: Deeper Setbacks Emerging - Setups in CAD/JPY, USD/CAD

Christopher Vecchio, CFA, Senior Strategist
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Canadian Dollar Outlook:

  • USD/CAD rates are ripping towards a confluence of resistance, thanks in part to the lack of hawkish signaling by the Bank of Canada yesterday.
  • Meanwhile,CAD/JPY rates have lost a significant uptrend as risk appetite sours.
  • According to the IG Client Sentiment Index, USD/CAD rates have a near-term mixed bias.
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Losing the Narrative

The Canadian Dollar is struggling to overcome some short-term headwinds at present time. Weakness in energy markets has sapped a potent catalyst, while the July Bank of Canada meeting proved to meet expectations on its taper efforts – and it’s it. BOC rate hike odds through the end of the year have come down from about 40% to 30% in the past 36-hours.

Elsewhere, declining global bond yields (eroding the carry trade) coupled with weakness in equity markets has sapped risk appetite. The spillover impact into CAD/JPY and USD/CAD rates has produced meaningful technical developments through the middle of July.

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

CAD/JPY rates have dropped to a fresh monthly low on the session, trading at 87.11 at the time this report was written. They’re below their daily EMA envelope, which is in full bearish sequential order. Daily MACD is falling, while daily Slow Stochastics are shifting back towards oversold territory. Concurrently, CAD/JPY rates also dropped below the 38.2% Fibonacci retracement of the uptrend from the late-January low/May high range at 87.29, suggesting that a deeper setback is possible below 86.00 in the coming sessions.

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

USD/CAD rates are struggling as BOC rate hike odds pull back and Fed rate hike odds creep forward, ever so slowly. Sprinkle in weaker crude oil prices, and it’s a potent near-term mix for more upside in the pair. Having already broken the descending channel resistance earlier this month, fresh July highs were established today. The pair’s momentum profile is thoroughly bullish, with USD/CAD rates above their daily EMA envelope in bullish sequential order, while daily MACD has risen to its highest point since the start of the pandemic, and daily Slow Stochastics are on the verge of reentering overbought territory. More gains into the April high (bearish key reversal high) at 1.2654 seem plausible before resistance is found.

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IG Client Sentiment Index: USD/CAD Rate Forecast (July 15, 2021) (Chart 3)

USD/CAD: Retail trader data shows 59.26% of traders are net-long with the ratio of traders long to short at 1.45 to 1. The number of traders net-long is 15.60% lower than yesterday and 9.57% higher from last week, while the number of traders net-short is 9.70% higher than yesterday and 2.51% lower 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 less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

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--- 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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