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Canadian Dollar Forecast: Oil Prices Remain Key Driver - Setups in CAD/JPY, USD/CAD

Canadian Dollar Forecast: Oil Prices Remain Key Driver - Setups in CAD/JPY, USD/CAD

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Canadian Dollar Outlook:

  • The ongoing rebound in crude oil prices has given a lift to the Loonie.
  • CAD/JPY rates have recently traded above their daily 21-EMA, while USD/CAD rates have yet to fall below their one-month moving average.
  • According to the IG Client Sentiment Index, USD/CAD rates now have a bearish bias in the near-term.
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Oil Fueling Loonie Gains

Strength in energy markets is helping propel the Canadian Dollar higher at the end of the year. Energy, which accounts for approximately 11% of Canadian GDP, has a considerable sway over the Loonie, so it’s no surprise that the sharp rebound by crude oil prices over the past week have filtered into rallies by the major CAD-crosses. And with risk appetite having improved meaningfully in recent days, safe haven counterparts like the Japanese Yen and the US Dollar are fading, allowing CAD strength to shine through in pairs like CAD/JPY and USD/CAD rates.

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

CAD/JPY rates have continued their rally from the 61.8% Fibonacci retracement of the August low/October range at 87.86, finally achieving a move higher through the daily 21-EMA – the one-month moving average – by the end of last week. Of equal consequence, the pair was also able to climb above the descending trendline from the October and November swing highs, suggesting that a near-term bottom has finally been established.

Bullish momentum continues to improve. Daily MACD is on the verge of climbing above its signal line, while daily Slow Stochastics have entered overbought territory. CAD/JPY rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in full bullish sequential order. Further gains are anticipated into the early-December high at 90.37 in the near-term.

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

In the prior update it was noted that “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.” Crude oil prices have hurdled 73.34, suggesting that more USD/CAD weakness could be on the way. Unlike CAD/JPY rates, however, USD/CAD rates have yet to emerge on the other side of their daily 21-EMA, which has as support over the past few trading days. Doing so would be a strong indication that the tide has finally turned.

For now, bearish momentum is gathering pace, albeit more slowly than bullish momentum has emerged in CAD/JPY rates. Daily MACD continues to trend lower, but is not yet close to moving below its signal line. Daily Slow Stochastics are falling, but are not yet below their median line. And USD/CAD rates are sitting amid their daily EMA envelope, which is not yet in bearish sequential order. Ultimately, if one is seeking more CAD strength in the near-term, CAD/JPY rates have a more favorable setup than USD/CAD rates.

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IG Client Sentiment Index: USD/CAD Rate Forecast (December 29, 2021) (Chart 3)

USD/CAD: Retail trader data shows 56.50% of traders are net-long with the ratio of traders long to short at 1.30 to 1. The number of traders net-long is 2.80% lower than yesterday and 39.70% higher from last week, while the number of traders net-short is 3.39% lower than yesterday and 44.63% 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.

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

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

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