Canadian Dollar Forecast: Continued Consolidation

Canadian Dollar Outlook:

• The Canadian Dollar has experienced a bit of volatility in recent days, but nothing has fundamentally changed.
• CAD/JPY rates remain in a symmetrical triangle, while USD/CAD rates have turned lower at significant resistance.
• According to the IG Client Sentiment Index, USD/CAD rates have a mixed bias in the near-term.

Oil Stabilizes, Equity Markets Rally

The Bank of Canada’s continued hawkish bias may be helping insulate the Canadian Dollar despite the sharp sell-off in energy prices earlier this week. As noted previously, “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.”

Still, the technical picture has not eroded meaningfully. CAD/JPY rates remain in a symmetrical triangle following an uptrend, while USD/CAD rates have turned lower from significant resistance carved out in recent months.

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

CAD/JPY rates pulled back over the past month 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 2022, 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. A move back above the June high at 107.21 would offer a strong confirmation signal that the next leg higher has commenced, targeting the 100% Fibonacci extension of the March 2022 low/April 2022 high/May 2022 low range at 111.09.

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

Once again, USD/CAD rates reached resistance and turned lower against 1.3077, a purported double top – now triple top? – after weathering the recent bout of USD strength and energy prices weakness. Momentum remains 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 moving towards overbought territory – but a move below the daily 5-EMA and former resistance around 1.2950 would suggest a short-term drop towards 1.2800 is in play. A close above 1.3077 would negate this perspective, setting up a fresh bullish breakout opportunity.

IG Client Sentiment Index: USD/CAD Rate Forecast (July 7, 2022) (Chart 3)

USD/CAD: Retail trader data shows 33.55% of traders are net-long with the ratio of traders short to long at 1.98 to 1. The number of traders net-long is 9.28% lower than yesterday and 29.50% lower from last week, while the number of traders net-short is 8.58% higher than yesterday and 13.97% 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.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bullish contrarian trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist