Canadian Dollar Outlook:
- Continued gains by crude oil prices are helping propel the Canadian Dollar at the start of 2022.
- CAD/JPY rates are now back to levels last seen in November 2021, while USD/CAD rates have reentered a multi-month symmetrical triangle that governed price action for most of 2021.
- According to the IG Client Sentiment Index, USD/CAD rates now have a bullish bias in the near-term.
Yields, Oil Continuing to Fuel Loonie Strength
A common phrase heard on trading desks this time of year is “just because the year ends, doesn’t mean the trend bends.” In this case, the strong, positive relationship between the Canadian Dollar and crude oil prices that persisted at the end of 2021 has continued into 2022. The 20-day correlation between crude oil prices and USD/CAD is -0.51, while the 20-day correlation between crude oil prices and CAD/JPY is +0.86. The continued push higher by oil prices only serves to benefit the Canadian Dollar, while rising long-end bond yields around the globe have duly sapped demand for safe haven currencies.
CAD/JPY Rate Technical Analysis: Daily Chart (January 2021 to January 2022) (Chart 1)
CAD/JPY rates are continuing to show signs of gathering bullish momentum, with the pair extending further above their daily 5-, 8-, 13-, and 21-EMA envelope, achieving the initial upside target outlined last week when it was noted that “further gains are anticipated into the early-December high at 90.37 in the near-term.” The brief drop on the first trading day of 2021 saw rates rebound at the 50% Fibonacci retracement of the 2015 high/2020 low range at 90.16 before rebounding. It remains the case “that a near-term bottom has finally been established.” CAD/JPY rates are still on course to return to their 2021 high at 93.02 in the coming weeks.
USD/CAD Rate Technical Analysis: Daily Chart (January 2021 to January 2022) (Chart 2)
In the prior update it was noted that “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.” Indeed, USD/CAD rates have dropped below their daily 21-EMA, treating the one-month moving average as resistance upon the first retest. With the pair back in the multi-month symmetrical triangle that governed price action for most of 2021, the near-term technical outlook has turned increasingly bearish.
Momentum continues to accelerate to the downside, with USD/CAD rates below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD continues to trend lower, nearing a cross below its signal line, while daily Slow Stochastics are hovering just above overbought territory. A deeper setback below 1.2600 may soon transpire.
IG Client Sentiment Index: USD/CAD Rate Forecast (January 4, 2022) (Chart 3)
USD/CAD: Retail trader data shows 53.50% of traders are net-long with the ratio of traders long to short at 1.15 to 1. The number of traders net-long is 11.89% lower than yesterday and 11.89% lower from last week, while the number of traders net-short is 35.60% higher than yesterday and 1.13% 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.
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
