Canadian Dollar Outlook:
- Crude oil prices have surged to fresh yearly highs, helping the energy-linked Canadian Dollar maintain its bullish momentum.
- Both CAD/JPY and USD/CAD rates are trading at levels last seen in mid-November 2021.
- According to the IG Client Sentiment Index, USD/CAD rates have a mixed bias in the near-term.
Loonie’s Run Fueled by Oil, Still
The continued strength seen in energy markets is providing air under the Loonie’s wings. With more and more data suggesting that the COVID-19 omicron variant is mild compared to prior iterations, concerns about a significant global economic slowdown have faded away. Crude oil prices have benefited from the resurgent growth expectations, climbing to their highest level since November 16, 2021.
Concurrently, the energy-linked Canadian Dollar has followed suit. The Canadian economy is highly sensitive to oil prices, insofar as energy constitutes approximately 11% of GDP. It’s thus no surprise that the strong correlation between crude oil prices and the Canadian Dollar has remained in place through the first two weeks of 2022. The 20-day correlation between crude oil prices and USD/CAD is -0.86, while the 20-day correlation between crude oil prices and CAD/JPY is +0.93.
Further Canadian Dollar strength is largely predicated on the continued strong performance in energy markets – the best performing sector of the US S&P 500 in the early days of 2022.
CAD/JPY Rate Technical Analysis: Daily Chart (January 2021 to January 2022) (Chart 1)
CAD/JPY rates are on the verge of establishing a fresh monthly and yearly high closing level as bullish momentum continues to accelerate. The pair remains above its daily 5-, 8-, 13-, and 21-EMA envelope, having recently found support at the daily 8-EMA; the EMA envelope is in bullish sequential order. Daily MACD is trending higher above its signal line, while daily Slow Stochastics have turned higher while in overbought territory – a sign of strong momentum. It remains the case that “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)
Last week it was noted that “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.” Since then, USD/CAD rates have dropped to fresh monthly and yearly lows, achieving levels last seen in mid-November 2021.
Bearish momentum continues to gather pace, with USD/CAD rates below their daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Daily MACD has now crossed below its signal line while trending lower, and daily Slow Stochastics have dipped into oversold territory. Whereas last week it was observed that “a deeper setback below 1.2600 may soon transpire,” with USD/CAD rates trading at 1.2600 at the time of writing, a further fall below 1.2500 appears to be on deck.
IG Client Sentiment Index: USD/CAD Rate Forecast (January 11, 2022) (Chart 3)
USD/CAD: Retail trader data shows 68.84% of traders are net-long with the ratio of traders long to short at 2.21 to 1. The number of traders net-long is 0.13% lower than yesterday and 48.61% higher from last week, while the number of traders net-short is 7.96% higher than yesterday and 22.60% 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
