Canadian Dollar Outlook:
- The Canadian Dollar has weathered a bout of bad economic data, continuing to be buoyed by oil prices.
- USD/CAD rates are in a sideways range spanning roughly 150-pips, while CAD/JPY rates continue to trade within the confines of a symmetrical triangle.
- According to the IG Client Sentiment Index, USD/CAD rates have a bearish bias in the near-term.
Through the Storm
Last week it was noted that the upcoming slate of Canadian economic data may provide “an opportunity to ‘buy the dip’ in CAD/JPY rates, or conversely, ‘selling the rally’ in USD/CAD rates.” Indeed, with the January Canada employment change report and unemployment rate disappointing expectations, weakness was seen in the major CAD-crosses.
Alas, the storm may have passed for the Loonie. A continued push higher by interest rates in developed economies has safe haven currencies on their backfoot, while gains by crude oil prices continue to make the Canadian Dollar an attractive proxy. The recent range carved out by USD/CAD rates may soon yield a bearish breakout opportunity, while CAD/JPY rates may soon have the chance to trade to multi-month symmetrical triangle resistance.
CAD/JPY Rate Technical Analysis: Daily Chart (February 2021 to February 2022) (Chart 1)
CAD/JPY rates have been grinding sideways for the past two weeks, still trapped within the confines of a symmetrical triangle that has been carved out since September 2021. It remains the case 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 October 2007 (all-time high) and December 2014 highs.” Furthermore, “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 (February 2021 to February 2022) (Chart 2)
For nearly the past two weeks, USD/CAD rates have been trading sideways between their daily 21-EMA (one-month moving average) and the 38.2% Fibonacci retracement of the 2012 low/2016 high range, approximately a 150-pip range. Consistent with sideways moves, opportunities for a bullish breakout or a bearish breakout exist simultaneously. Should USD/CAD rates trade higher through 1.2800, the measured move calls for a return to the December highs near 1.2950. Conversely, and what is the preferred direction, a breakdown by USD/CAD rates below 1.2650 would target 1.2500, where the rising trendline from the June and October 2021 swing lows appears.
IG Client Sentiment Index: USD/CAD Rate Forecast (February 7, 2022) (Chart 3)
USD/CAD: Retail trader data shows 63.74% of traders are net-long with the ratio of traders long to short at 1.76 to 1. The number of traders net-long is 23.25% higher than yesterday and 14.19% higher from last week, while the number of traders net-short is 7.04% higher than yesterday and 18.28% 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist