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Canadian Dollar Forecast: Rallies into Resistance as Oil, Stocks Weaken – Setups for CAD/JPY, USD/CAD

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Canadian Dollar Outlook:

  • The major CAD-crosses are still offering mixed signals, with both CAD/JPY and USD/CAD rates trading higher in recent days.
  • If USD/CAD rates continue to press higher, it may prove difficult for CAD/JPY rates to achieve a bullish breakout.
  • However, according to the IG Client Sentiment Index, USD/CAD rates have a bearish bias in the near-term.

Weaker Energy Clips Loonie’s Wings

The Canadian Dollar has been rangebound currency in recent weeks; there’s no clear direction when looking at the Loonie in aggregate across the majors. A microcosm of this environment lacking conviction has been the continued divergence in the two major CAD-crosses, which have been offering mixed signals throughout August. Even though both CAD/JPY and USD/CAD rates have moved higher in the second half of the month, it seems unlikely that both can sustain strength at the same time for a prolonged period of time – particularly if energy prices buck their uptrend.

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

Canadian Dollar Forecast: Rallies into Resistance as Oil, Stocks Weaken – Setups for CAD/JPY, USD/CAD

CAD/JPY rates have edged higher since the last update, but remain within a three-month range that has been carved out with support around 101.50 and resistance around 107.50. Momentum has improved, with thepair above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD continues to trend higher above its signal line, and daily Slow Stochastics are holding in overbought territory. It thus remains the case that “a move back toward the highs established in June and July is not out of the question…a more significant risk-off move in global equity markets and oil prices threatens to curtail the chances of a sustained rally to the upside.”

USD/CAD Rate Technical Analysis: Daily Chart (August 2021 to August 2022) (Chart 2)

Canadian Dollar Forecast: Rallies into Resistance as Oil, Stocks Weaken – Setups for CAD/JPY, USD/CAD

In the prior update it was noted that “improving momentum suggests a return to triangle resistance around 1.3075 may be the path of least resistance in the near-term.” While it took a little more than a week, USD/CAD rates overcame 1.3075 in today’s session. The pair is now trading near resistance of two patterns: an ascending parallel channel dating back to October 2021; and an ascending triangle that’s been forming since April. USD/CAD rates are still above their daily EMA envelope, which is in bullish sequential order. Daily MACD is trending higher above its signal line, while daily Slow Stochastics have entered overbought territory. Continued deterioration in US equity markets, noted by rising US 2-year yields and an elevated VIX, could help pave the path for USD/CAD rates to retest their yearly high above 1.3200 in short order.

IG Client Sentiment Index: USD/CAD Rate Forecast (August 30, 2022) (Chart 3)

Canadian Dollar Forecast: Rallies into Resistance as Oil, Stocks Weaken – Setups for CAD/JPY, USD/CAD

USD/CAD: Retail trader data shows 45.86% of traders are net-long with the ratio of traders short to long at 1.18 to 1. The number of traders net-long is 1.55% higher than yesterday and 3.81% higher from last week, while the number of traders net-short is 15.35% lower than yesterday and 15.72% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/CAD prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Strategist