Canadian Dollar Technical Analysis: Rebounding Oil Fuels Loonie Rally – Setups for CAD/JPY, USD/CAD

Canadian Dollar Outlook:

• Strength in CAD-crosses the past few days remains technically inconsequential.
• While further Canadian Dollar strength is possible, it largely is contingent upon oil prices continuing their rebound.
• According to the IG Client Sentiment Index, USD/CAD rates still have a bullish bias in the near-term.

Following Oil’s Move Higher

Earlier this week, our look at crude oil prices suggested that “the near-term upside bias may be to the topside, with a return to the December highs at 73.34 possible before the next leg lower.” Crude oil prices have indeed rallied, helping fuel a turnaround in energy-linked currencies like the Canadian Dollar in the first half of this week.

Nevertheless, the Canadian Dollar’s gains over the past few days are modest at best, having just rebounded from multiple month lows against the Japanese Yen (CAD/JPY hit its lowest rate since the first week of October 2021) and the US Dollar (USD/CAD hit its highest rate since the first week of December 2020).

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

CAD/JPY rates briefly set a fresh monthly low this week before rebounding from a familiar area: the descending trendline from the October 2007 (all-time high) and December 2014 highs, treating former multi-decade resistance as support; and the 61.8% Fibonacci retracement of the August low/October range near 87.86. This was anticipated as per the prior Canadian Dollar forecast, which noted “further losses towards the 61.8% Fibonacci retracement of the August low/October range near 87.86 may transpire over the next few days.”

CAD/JPY rates have traded above their daily 5-, 8-, and 13-EMAs, but have thus far been capped by their daily 21-EMA – as was the case with the rebound earlier this month. Both daily MACD and daily Slow Stochastics have turned higher, but remain below their respective signal and median lines. Price action needs to develop further from here – closing above the daily 21-EMA would be a good first step – as it’s too soon to say if this is ‘the low’ for CAD/JPY rates for the foreseeable future, insofar as the downtrend from the October high remains in place.

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

In the prior update it was noted that “a move towards the December high at 1.2854 in the coming days possible.” USD/CAD rates briefly topped their former December high, setting a fresh 2021 high at 1.2964 before turning lower. It’s possible that resistance in an ascending triangle against the August and December highs his being carved out.

The pullback in USD/CAD rates has thus far been technically inconsequential. The pair is back below its daily 5-EMA, but remains above its daily 8-, 13-, and 21-EMAs, and the EMA envelope remains in bullish sequential order. Daily MACD is nearing a bearish crossover albeit above its signal line, while daily Slow Stochastics are still lingering in overbought territory.

While further Canadian Dollar strength is possible, it largely is contingent upon oil prices continuing their rebound, a sticky situation as markets endure volatility around COVID-19 omicron variant headlines. If crude oil prices are able to clear 73.34, however, then it would be a favorable sign that the Loonie rally could have some room to run yet.

IG Client Sentiment Index: USD/CAD Rate Forecast (December 22, 2021) (Chart 3)

USD/CAD: Retail trader data shows 33.99% of traders are net-long with the ratio of traders short to long at 1.94 to 1. The number of traders net-long is 6.57% lower than yesterday and 14.96% lower from last week, while the number of traders net-short is 1.53% lower than yesterday and 15.55% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/CAD prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bullish contrarian trading bias.

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