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Canadian Dollar Technical Analysis: Loonie Charts Deeper Setback – Setups in CAD/JPY, USD/CAD

Canadian Dollar Technical Analysis: Loonie Charts Deeper Setback – Setups in CAD/JPY, USD/CAD

Christopher Vecchio, CFA, Senior Strategist

Canadian Dollar Outlook:

  • While USD/CAD rates have been carving out a potential inverse head and shoulders pattern, CAD/JPY rates appear to be working on a head and shoulders pattern themselves.
  • Canadian economic data has underperformed of late: the Citi Economic Surprise Index for Canada sits at +19.9, down from +31.1 at the end of July.
  • According to the IG Client Sentiment Index, USD/CAD rates have a near-term bullish bias.

Wings Still Clipped

The Canadian Dollar has experienced quite a bit of volatility recently. USD/CAD’s 20-day ATR is up nearly +30% from its August low, while CAD/JPY’s 20-day ATR has increased by approximately +17%. Gyrations in US Treasury yields, US equity markets, and oil prices have hampered the Loonie – so too have growing domestic Canadian political issues.

With Canadian economic data proving relatively disappointing in recent weeks – the Citi Economic Surprise Index for Canada sits at +19.9, down from +31.1 at the end of July – the Loonie may still be facing troubles ahead.

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

Canadian Dollar Technical Analysis: Loonie Charts Deeper Setback – Setups in CAD/JPY, USD/CAD

In the update issued on August 9, it was noted that “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.”

Symmetrical triangle support was breached, and price action today is producing a bearish outside engulfing bar (or bearish key reversal) on the daily timeframe. Taking a step back, it’s also possible that CAD/JPY is in the midst of carving out a right shoulder in a head and shoulders pattern, which would ultimately target a move closer towards 80.00. More downside looks plausible from here.

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

Canadian Dollar Technical Analysis: Loonie Charts Deeper Setback – Setups in CAD/JPY, USD/CAD

On August 9 it was noted that “another run up to the yearly highs near 1.2800 can’t be dismissed in the short-term.” USD/CAD rates spiked to a fresh yearly high last week, and an evening star candlestick pattern emerged as a near-term top. But USD/CAD rates found support against the rising trendline from the June and August swing lows, suggesting that buying interest remains strong.

This series of ‘higher highs’ and ‘higher lows’ has been buttressed by a potential morning star candlestick cluster forming over the past three days, an indication that gains to and through the descending trendline from the January 2016 high and September 2020 low – a dynamic level of support and resistance over the past year – is possible. As CAD/JPY rates continue to work on a head and shoulders pattern, USD/CAD rates are working on an inverse head and shoulders pattern –both of which spell potentially greater weakness for the Canadian Dollar.

IG Client Sentiment Index: USD/CAD Rate Forecast (August 26, 2021) (Chart 3)

Canadian Dollar Technical Analysis: Loonie Charts Deeper Setback – Setups in CAD/JPY, USD/CAD

USD/CAD: Retail trader data shows 74.47% of traders are net-long with the ratio of traders long to short at 2.92 to 1. The number of traders net-long is 3.56% higher than yesterday and 89.27% higher from last week, while the number of traders net-short is 8.72% higher than yesterday and 35.75% 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.

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

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