Has Loonie Weakness Run its Course? Setups for CAD/JPY, USD/CAD

Canadian Dollar Outlook:

• The Canadian Dollar has been on a losing streak, but technical setups suggest that a change in fortunes could arrive soon.
• CAD/JPY rates have rebounded at former range resistance (now support), while USD/CAD rates could be carving out a double top.
• According to the IG Client Sentiment Index, USD/CAD rates have a mixed bias in the near-term.

Weaker Oil Hasn’t Helped

The Bank of Canada holds an increasingly hawkish bias, but that hasn’t helped the Canadian Dollar in the face of a steep sell-off in energy prices. The drop in crude oil prices and natural gas prices has proved a meaningful headwind for the Loonie, as have growing concerns that the global economy is starting to slow; the fundamental narrative has taken a hit. Nevertheless, the technical picture is a bit more constructive in the short-term. The bout of weakness by the CAD-crosses may have run its course in recent weeks, with conditions on the table for a rally in CAD/JPY rates and a pullback in USD/CAD rates through the end of June.

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

CAD/JPY rates pulled back over the past two weeks after breaking their December 2014 high, trading to their highest level since February 2008. But support was found at former resistance of the range that began in April, suggesting that the technical posture remains bullish. The aforementioned range called for a measured move higher above 108.00, which has not yet been achieved, thus exists the potential for another swing higher before exhaustion transpires.

CAD/JPY rates have yet to see bullish momentum reignite. The pair is above its daily 5-, 8-, 13-, and 21-EMA envelope, which is not yet in bullish sequential order. Daily MACD is trending lower, albeit remains above its signal line, while daily Slow Stochastics are below their median line for the first time since the end of May. A move back above last week’s high at 105.52 would offer a strong confirmation signal that the next leg higher has commenced.

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

USD/CAD rates reached resistance in the upward sloping parallel channel carved out since late-October 2021. A double top may be carved out against 1.3077, suggesting that the recent leg higher has been completed. Momentum remains outright bullish – USD/CAD rates are above their daily EMA envelope, which is in bullish sequential order, daily MACD is trending higher through its signal line, and daily Slow Stochastics are in overbought territory – but a move below the daily 5-EMA would warrant strong consideration that a swing lower towards 1.2600 may be beginning. Conversely, a move above 1.3077 would negate this perspective, setting up a fresh bullish breakout opportunity.

IG Client Sentiment Index: USD/CAD Rate Forecast (June 20, 2022) (Chart 3)

USD/CAD: Retail trader data shows 35.87% of traders are net-long with the ratio of traders short to long at 1.79 to 1. The number of traders net-long is 22.18% higher than yesterday and 31.14% lower from last week, while the number of traders net-short is 12.38% higher than yesterday and 76.60% higher 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.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist