Canadian Dollar Technical Analysis: CAD Bulls Face Exhaustion - Levels for CAD/JPY, USD/CAD

Canadian Dollar Outlook:

• The Canadian Dollar’s strong run through October has continued, bolstered by surging energy prices and a favorable data backdrop.
• Recent price action in CAD-crosses speaks to near-term exhaustion by the Loonie, which may harken some profit taking in the short-term before the rally resumes.
• According to the IG Client Sentiment Index, USD/CAD rates have a bullish bias in the near-term.

Loonie Out of Breath

The Canadian Dollar’s strong run through October has continued, bolstered by surging energy prices and a favorable data backdrop. The upcoming release of the September Canada inflation rates report may even help propel that narrative that the Bank of Canada will announce another stepdown in its stimulus efforts when it meets later this month. Alas, recent price action in CAD-crosses speaks to near-term exhaustion by the Loonie, which may harken some profit taking in the short-term before the rally resumes.

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

Last week it was noted that “there could be a brief pause in bullish momentum now that the bullish falling wedge has been completed – but momentum indicators that, directionally, the bias remains higher.” The pause in the CAD/JPY rate rally was brief, with the pair returning to its daily 5-EMA before resuming its climb.

Overall, bullish momentum remains firm and the pair remains in ‘buy the dip’ mode. CAD/JPY rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is continuing to stretch higher above its signal line, while daily Slow Stochastics are persisting in overbought territory.

A similar setup to last week’s pause may be emerging. The shooting star candle on the daily timeframe see traders selling CAD/JPY on rallies above 92.50, with wicks forming above said level each of the past three trading sessions. If a return back to the daily 5-EMA is in the cards before continuation higher, then CAD/JPY could fall back below 92.00 in the coming days.

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

The turnaround in the Canadian is more prominent in USD/CAD than CAD/JPY, which speaks volumes about potential incoming CAD weakness considering that the DXY Index is still struggling. The hammer candle suggests a reversal higher may be coming; a round of profit taking for shorts after breaking below the September low.

For now, a rebound may setup another opportunity to sell USD/CAD rates as the momentum structure remains bearish. USD/CAD rates are below their daily EMA envelope, which is in bearish sequential order. Daily MACD is trending lower below its signal line, while daily Slow Stochastics are holding in oversold territory. It remains the case that “deeper losses should be anticipated over the coming weeks.”

IG Client Sentiment Index: USD/CAD Rate Forecast (October 19, 2021) (Chart 3)

USD/CAD: Retail trader data shows 73.04% of traders are net-long with the ratio of traders long to short at 2.71 to 1. The number of traders net-long is 2.88% lower than yesterday and 8.85% lower from last week, while the number of traders net-short is 6.18% higher than yesterday and 6.18% 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