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Canadian Dollar Outlook:

Risk Aversion Halts CAD Strength

The Canadian Dollar is having a meager start to the week, even as crude oil prices continue to tick higher. A sharp decline in global equity markets, particularly those in the United States, is weighing on risk appetite, stoking demand for safe haven currencies like the Japanese Yen and US Dollar. 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.

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

Canadian Dollar Forecast: Risk Aversion Curbs Loonie - Setups in CAD/JPY, USD/CAD

CAD/JPY rates have reversed lower on the session, with both last Monday’s and today’s daily candlesticks shaping into shooting stars; the wicks above 92.00 suggest meaningful resistance has been established in the short-term. While higher bond yields and stronger oil prices should undermine the appeal of the Japanese Yen, the broader risk-off tone in markets is thus far holding back any additional upside.

Momentum has waned as a result, with CAD/JPY rates falling below their daily 5-EMA. Daily MACD is close to issuing a bearish crossover (albeit above its signal line), while daily Slow Stochastics have continued their descent out of overbought territory. A further drop to the daily 21-EMA (90.64 at the time of writing) may play out in the short-term before CAD/JPY rates find 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)

Canadian Dollar Forecast: Risk Aversion Curbs Loonie - Setups in CAD/JPY, USD/CAD

USD/CAD rates have stabilized over the past few days after finding support at the uptrend from the June and October 2021 swing lows. Like in CAD/JPY, broad risk aversion is superseding the tailwind that higher oil prices typically provide for the Canadian Dollar. Accordingly, it may be the case that a further rally from here transpires before another attempt to breakdown through the aforementioned uptrend. For now, rallies into the daily 21-EMA (1.2650 at the time of writing) look to be sold.

IG Client Sentiment Index: USD/CAD Rate Forecast (January 18, 2022) (Chart 3)

Canadian Dollar Forecast: Risk Aversion Curbs Loonie - Setups in CAD/JPY, USD/CAD

USD/CAD: Retail trader data shows 73.80% of traders are net-long with the ratio of traders long to short at 2.82 to 1. The number of traders net-long is 6.94% higher than yesterday and 27.50% higher from last week, while the number of traders net-short is 4.24% lower than yesterday and unchanged 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

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