Canadian Dollar Outlook:
- The Canadian Dollar has benefited immensely from sustained higher energy prices as well as a rebound in risk appetite over the past two weeks.
- USD/CAD rates have broken through ascending triangle support, while CAD/JPY rates have reached a key multi-year Fibonacci retracement.
- According to the IG Client Sentiment Index, USD/CAD rates have a mixed bias in the near-term.
Loonie Liftoff
Like so many other currencies whose countries export commodities, the Canadian Dollar has benefited immensely in an environment defined by higher base metals and energy prices. And as a relatively higher yielding currency, the recent rebound in risk appetite has reinvigorated the Loonie as a carry trade prospect.
USD/CAD losses in the face of an otherwise resilient US Dollar bode well for the Canadian Dollar moving, never mind the exceptional performance over the last two weeks that CAD/JPY has endured. While these bullish CAD moves may be a little ‘long in the tooth,’ the technical picture suggests that any opportunities to get long the Canadian Dollar on pullbacks is the preferred outcome in the near-term.
CAD/JPY Rate Technical Analysis: Weekly Chart (August 2014 to March 2022) (Chart 1)
After trading in a symmetrical triangle that had formed since September 2021, CAD/JPY rates have burst higher over the past three weeks, rising to their highest level since June 2015. These gains have been in-line with longer-term expectations, as its been noted multiple times in recent months that “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 November 2007 (all-time high) and December 2014 highs.”
The pair is above its daily 5-, 8-, 13-, and 21-EMA envelope, as well as its weekly 4-, 8-, and 13-EMA envelope, both of which are in bullish sequential order. Weekly MACD continues to rise above its signal line, while weekly Slow Stochastics are holding in overbought territory. Having reached the 76.4% Fibonacci retracement of the 2015 high/2020 low range, CAD/JPY rates may experience a near-term pullback that would setup an opportunity to look long again given the momentum structure.
USD/CAD Rate Technical Analysis: Daily Chart (March 2021 to March 2022) (Chart 2)
Bigger picture, USD/CAD rates had been trading into an ascending triangle formation starting in June 2021. In the past week-plus, the pair has broken down through the rising trendline from the June 2021, October 2021, and January 2022 swing lows; the retest of former support proved itself as resistance just yesterday. It stands to reason that the technical bias has shifted from neutral to bearish for the foreseeable future.
Bearish momentum is strong. USD/CAD rates are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD continues to decline below its signal line, while daily Slow Stochastics are holding in oversold territory. The near-term bearish bias would remain valid until USD/CAD rates closed above their daily 21-EMA, which they have not done since March 15.
IG Client Sentiment Index: USD/CAD Rate Forecast (March 29, 2022) (Chart 3)
USD/CAD: Retail trader data shows 74.16% of traders are net-long with the ratio of traders long to short at 2.87 to 1. The number of traders net-long is 10.01% higher than yesterday and 2.41% lower from last week, while the number of traders net-short is 10.07% lower than yesterday and 1.11% 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 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.
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--- Written by Christopher Vecchio, CFA, Senior Strategist
