Canadian Dollar Outlook:
- Oil prices are surging to fresh yearly highs, and now that Canadian federal elections are in the rearview mirror, the Loonie is able to follow.
- USD/CAD rates are back below a multi-year trendline while losing triangle support, and CAD/JPY rates are finding follow through from a bullish falling wedge.
- According to the IG Client Sentiment Index, USD/CAD rates have a mixed bias in the near-term.
Oil Finally Fueling Loonie?
Throughout September, the Canadian Dollar had decoupled from its most significant driver, energy. With Canadian federal elections weighing on price action – and sidelining the Bank of Canada – the Loonie was unable to take advantage of an otherwise bullish environment defined by surging oil prices. But now that October has arrived, and Canadian federal elections have passed, the Canadian Dollar is able to track more closely energy prices – and the BOC may be given leeway to resume its policy normalization efforts.
CAD/JPY Rate Technical Analysis: Daily Chart (October 2020 to October 2021) (Chart 1)
It appears that a bullish falling wedge has formed over the past six months, with resistance measured against the June and July 2021 swing highs, and support measured against the April and July 2021 lows. Price action over the past week saw CAD/JPY rates retest wedge resistance (now support) after the bullish breakout initiation, suggesting that a run above the descending trendline from the October 2007 (all-time high) and December 2014 highs is in its early stages.
Momentum is turning increasingly bullish on the daily timeframe. CAD/JPY rates are rallying above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD’s advance has now cleared its signal line, while daily Slow Stochastics are holding in overbought territory. A move above the 23.6% Fibonacci retracement of the 2021 low/high range at 88.68 would suggest gains towards the yearly high (91.19) is due this October.
USD/CAD Rate Technical Analysis: Daily Chart (October 2020 to October 2021) (Chart 2)
USD/CAD rates have been trading sideways for several weeks, but may finally be seeing a directional breakout. The pair is exiting its symmetrical triangle to the downside while below descending trendline from the January 2016 high and September 2020 low.
Momentum is becoming increasingly bearish as the breakout gathers pace. USD/CAD rates are below their daily EMA envelope, which is quickly aligning in bearish sequential order. Daily MACD continues to decline, even though it is not below its signal line, but daily Slow Stochastics have already slipped back into oversold territory.
In losing the 23.6% Fibonacci retracement of the 2020 high/2021 low range at 1.2635, a more significant selloff may just be getting started.
IG Client Sentiment Index: USD/CAD Rate Forecast (October 4, 2021) (Chart 3)
USD/CAD: Retail trader data shows 70.20% of traders are net-long with the ratio of traders long to short at 2.36 to 1. The number of traders net-long is 11.62% higher than yesterday and 1.47% lower from last week, while the number of traders net-short is 12.08% higher than yesterday and 2.37% 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 Strategist
