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Canadian Dollar Technical Analysis: Slumping Oil Weighs Down the Loonie – Setups in CAD/JPY, USD/CAD

Canadian Dollar Technical Analysis: Slumping Oil Weighs Down the Loonie – Setups in CAD/JPY, USD/CAD

Christopher Vecchio, CFA, Senior Strategist

Canadian Dollar Outlook:

  • USD/CAD rates have been boosted by sagging crude oil prices and rising Fed rate hike odds. CAD/JPY rates are proving more stable despite the headwinds.
  • Concerns over the delta variant are proliferating, impeding growth-sensitive assets.
  • According to the IG Client Sentiment Index, USD/CAD rates have a near-term mixed bias.

Like an Albatross

The Canadian Dollar has started to hit the skids again. July proved difficult, and trading through the first week of August has remained difficult. Weighed down by sagging crude oil prices, the Loonie has been deprived of one of its most potent catalysts. But the impact on the two major CAD-crosses, CAD/JPY and USD/CAD, has been disparate.

While weaker energy prices have been a liability for both pairs, rising Fed rate hike odds alongside rising US Treasury yields have put the US Dollar on more favorable footing versus the Japanese Yen. The net-result has been a resurgent USD/CAD, while CAD/JPY rates continue to grind sideways.

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

Canadian Dollar Technical Analysis: Slumping Oil Weighs Down the Loonie – Setups in CAD/JPY, USD/CAD

Two weeks ago it was noted that “failing to breach the April swing low is an important development, concurrent with a rebound above the 50% Fibonacci retracement of the late-January low/May high range at 86.09. It’s too soon to say that the turn has arrived given the relationship among CAD/JPY rates and its slew of indicators, but we have early evidence that ‘the low’ may have been found.

CAD/JPY rates have been trading sideways ever since then, and it’s possible that the pair is funneling into a symmetrical triangle. Nevertheless, persisting below the descending trendline from the October 2007 (all-time high) and December 2014 highs suggests traders should keep an open mindset for more downside – at least for now.

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

Canadian Dollar Technical Analysis: Slumping Oil Weighs Down the Loonie – Setups in CAD/JPY, USD/CAD

Similarly, in the last-third of July it was noted that USD/CAD traded “above 1.2800for the first time since early-February. In doing so, USD/CAD rates ran into two critical resistance levels which, if there were ever a place for ‘the top’ to be found, this would be it.” Indeed, that was the high of the year for the pair, but USD/CAD rates never returned to the descending channel in place since last September.

Momentum is starting to turn more bullish again. USD/CAD rates are establishing themselves above their daily 5-, 8-, 13-, and 21-EMA envelope, which is aligning into bullish sequential order. Daily MACD’s decline above its signal line is turning – a potential bullish signal – while daily Slow Stochastics have already rebounded from oversold condition and are nearing a move above their median line. Another run up to the yearly highs near 1.2800 can’t be dismissed in the short-term (particularly if crude oil prices slide further, which seems possible near-term as well).

IG Client Sentiment Index: USD/CAD Rate Forecast (August 9, 2021) (Chart 3)

Canadian Dollar Technical Analysis: Slumping Oil Weighs Down the Loonie – Setups in CAD/JPY, USD/CAD

USD/CAD: Retail trader data shows 65.96% of traders are net-long with the ratio of traders long to short at 1.94 to 1. The number of traders net-long is 13.15% higher than yesterday and 8.96% lower from last week, while the number of traders net-short is 2.84% higher than yesterday and 5.58% 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.

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

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