Canadian Dollar Outlook:
- The Bank of Canada refrained from changing rates or the pace of its QE program, not a surprise given recent political events and downturn in economic data due to the surge in COVID-19 delta variant infections.
- USD/CAD rates are on the precipice of returning back above a multi-year trendline, while CAD/JPY rates are backing away from triangle resistance.
- According to the IG Client Sentiment Index, USD/CAD rates have a near-term bullish bias.
Oil Not Fueling Loonie
The Canadian Dollar is experiencing more and more volatility in recent days – not a good sign for Loonie bulls. USD/CAD’s 20-day ATR is now 91-pips, over +36% higher than its August low, while CAD/JPY’s 20-day ATR is 70-pips, up +12%. Higher volatility typically corresponds to weakness in the Loonie, which remains on weak technical footing versus both its Japanese Yen and US Dollar counterparts.
Fundamentally speaking, the Bank of Canada’s decision to refrain from either altering interest rates or changing the pace of its QE program were foreseen in advance, unsurprising given the federal elections on September 20 and rising COVID-19 infections which have undercut the Canadian economy. Until either of these concerns find clarity, even gains by oil prices may not be enough to restore faith in the Canadian Dollar in the short-term.
CAD/JPY Rate Technical Analysis: Daily Chart (September 2020 to September 2021) (Chart 1)
On August 26, it was noted that “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.”
No resolution to either the bearish or bullish scenarios has been discerned, warranting a different approach to the charts. Instead, it appears that a descending triangle – with resistance measured against the June and July 2021 swing highs, and support measured against the April and July 2021 lows – has been forming below the descending trendline from the October 2007 (all-time high) and December 2014 highs, leaving open the possibility of more downside in the near-term.
Momentum is turning more bearish on the daily timeframe. CAD/JPY rates are slipping below their daily 5-, 8-, 13-, and 21-EMA envelope, which is starting to align in bearish sequential order. Daily MACD’s advance never cleared its signal line, while daily Slow Stochastics are on the verge of exiting overbought territory with a clear bearish divergence relative to price action. Another drop towards and below 85.00 may soon develop.
USD/CAD Rate Technical Analysis: Daily Chart (September 2020 to September 2021) (Chart 2)
While there has been a lot of choppy price action over the past two weeks, USD/CAD rates are essentially in the same spot they were in when we last discussed the pair on August 26. The pair continues to linger near the descending trendline from the January 2016 high and September 2020 low, while flirting with a break above the ascending trendline from the June and August 2021 swing lows.
The daily timeframe shows a shooting star forming after the BOC rate decision, but with more on that front due tomorrow when BOC Governor Tiff Macklem holds a press conference, it’s too early to say that the high for month has been carved out just yet.
IG Client Sentiment Index: USD/CAD Rate Forecast (September 9, 2021) (Chart 3)
USD/CAD: Retail trader data shows 63.31% of traders are net-long with the ratio of traders long to short at 1.73 to 1. The number of traders net-long is 12.17% lower than yesterday and 24.22% lower from last week, while the number of traders net-short is 15.78% higher than yesterday and 31.40% 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 Strategist
