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Canadian Dollar Forecast: Oil Provides Support; Jobs Data Ahead - Setups in CAD/JPY, USD/CAD

Canadian Dollar Forecast: Oil Provides Support; Jobs Data Ahead - Setups in CAD/JPY, USD/CAD

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Canadian Dollar Outlook:

  • The Canadian Dollar is benefiting from a rebound in risk appetite as well as another push higher by energy prices.
  • The January Canada jobs report at the end of the week could short-circuit the Loonie’s rally, if only temporarily.
  • According to the IG Client Sentiment Index, USD/CAD rates have a mixed bias in the near-term.
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CAD Following Oil, Stocks

The Canadian Dollar is having a strong start to the week as global equity markets and energy prices continue to press higher. And while our point of view has remained consistent in recent weeks – that “continued gains in energy markets suggest that Canadian Dollar losses should be limited, suggesting that ‘buy the dip’ opportunities are forming in the CAD-crosses” – the end of this week may provide such an opportunity.

Incoming Canadian labor market figures are expected to be quite disappointing, with a contraction in both headline jobs growth as well as a jump in the unemployment rate. Should the January Canada jobs report – one driven by temporary factors such as the surge in COVID-19 omicron variant infections – prove disappointing, it very well may once again setup an opportunity to ‘buy the dip’ in CAD/JPY rates, or conversely, ‘selling the rally’ in USD/CAD rates.

CAD/JPY Rate Technical Analysis: Daily Chart (January 2021 to January 2022) (Chart 1)

CAD/JPY rates have not made much progress in either direction over the past week, although it should be noted that they continue to trade within the confines of a symmetrical triangle that has been carved out since September 2021. Insofar as the preceding move was higher, the ultimate resolution of the symmetrical triangle is eyed for a bullish breakout – consistent with the bigger picture rally above the descending trendline from the October 2007 (all-time high) and December 2014 highs.

Momentum has started to pick back up, with CAD/JPY rates on the verge of closing above their daily 8-EMA for the first time since January 19. Daily MACD’s descent above its signal line is slowing, while daily Slow Stochastics have continued their climb out of oversold territory. CAD/JPY rates are still in the early stages of finding their footing for another attempt to climb through 92.00, ultimately “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)

USD/CAD rates have reversed lower after tagging the 38.2% Fibonacci retracement of the 2012 low/2016 high range at 1.2758, suggesting that the rally off of the ascending trendline from the June and October 2021 swing lows has been completed. While the jobs figures at the end of the week may prove to be an obstacle to more meaningful losses in the near-term, there is a reasonable technical basis to suggest that a near-term high as been established against 1.2814, the January swing high which was not reached; a series of lower highs and lower lows is in place over the past month of trading. Ultimately, rallies are still looking to be sold for a return back to the June and October 2021 trendline near 1.2500 by mid-February.

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IG Client Sentiment Index: USD/CAD Rate Forecast (January 31, 2022) (Chart 3)

USD/CAD: Retail trader data shows 55.71% of traders are net-long with the ratio of traders long to short at 1.26 to 1. The number of traders net-long is 16.07% higher than yesterday and 22.10% lower from last week, while the number of traders net-short is 15.10% higher than yesterday and 26.02% 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.

Positioning is more net-long than yesterday but less 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

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