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Canadian Dollar Rate Forecast: Oil and Key Data May Help CAD Further

Canadian Dollar Rate Forecast: Oil and Key Data May Help CAD Further

Tyler Yell, CMT, Currency Strategist

Canadian Dollar Rate Forecast Key Takeaways:

  • The ONE Thing: Optimism meets its test this week. The time may be right for further CAD strength to emerge if this week’s economic data align with recent comments from the BoC. At May’s open, Governor Poloz came out with ratherhawkish language such as ‘interest rates are heading higher’ and ‘forces in the economy suggest not the time to be at neutral.’ If CPI & Retail Sales this week can surprise, the market may be forced to reprice a more aggressive BoC that should lift CAD further.
  • Positioning data has aggressively neutralized on the lop-sided US Dollar short that helped to propel it higher in mid-April. Now, the focus may rest on the commodity currencies with Canadian Dollar and Australian Dollar futures long positions at 27% and 2% of the 52-wk range respectively. The short squeeze may shift from USD to CAD & AUD if data warrants an unwind of the short trade that institutions have recently loaded into.
  • The Canadian Dollar remains susceptible to headline risk around NAFTA and BoC. However Trump’s tough trade talk has appeared more as a way to cultivate the ground for negotiations as opposed to blowing up bridges never to be restructured as many feared.
  • IG UK Client Sentiment Highlight: changes in sentiment warn that the current USDCAD price trend may trade higher as IG UK retail traders are further net-short than yesterday and last week.

The Canadian Dollar has many traders scratching their head as the Bank of Canada says they’re both cautious on rate hikes, yet optimistic about the economy. One thing they can definitely be optimistic about is that crude oil appears set to help the trade balance with prices holding near the highest levels since November 2014 with the physical market only looking to tighten further.

Recommended Reading: Crude Oil Forecast: Trump Drops Iran Deal, Bulls Remain In Charge

In addition to a positive outlook for crude oil, the US Dollar bullish momentum that took CAD down appears to have slowed down and will meet important consumer data this week that will align with important Canadian economic data like CPI & Retail Sales.

If the US Dollar index remains below short-term resistance at 92.42, traders should give the benefit of the doubt to CAD bulls who have multiple factors supporting the re-emerging bullish case.

Unlock our Q2 forecast to learn what will drive trends for the US Dollar

Technical Focus on the Canadian Dollar – Trading Last Week’s High as a Bull Trap

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Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

Last week, we warned that USD/CAD traders may have just witnessed a bear trap. In short, what appeared to be a breakout of a multi-week range between 1.28-1.29 was quickly reversed with a move back below the May opening range low of 1.2803. What’s more is that the reversal took place at the 78.6% retracement of the March-April range, a level known as the point of last resistance for traders who follow Fibonacci analysis.

Not familiar with Fibonacci analysis, check out this insightful article

Now, price has reversed a swift move higher from C$1.2999 to provide swing traders with a strong resistance point to build a CAD long bias from. CAD traders should look to the CADJPY and other supporting markets to see if CAD strength may have legs.

Bearish targets currently sit at C$1.2628 and C$1.2400 as Fibonacci Expansion targets.

Valuable Insight from IG Client Positioning for USD/CAD: Retail selling activity jumps, biased higher

Canadian Dollar Rate Forecast: Oil and Key Data May Help CAD Further

Data source: IG Client Positioning

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDCAD-bullish contrarian trading bias (emphasis mine.)

MORE For You:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer a excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a surplus of helpful trading tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feedhas intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Discuss this market with Tyler in the live webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.

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