Canadian Dollar Forecast: Loonie’s Wings Clipped?

Canadian Dollar Outlook:

Canadian Dollar Flies Through Turbulence

The Canadian Dollar was hobbled last week, nearly falling through key technical levels as the global bond yield spike hit growth-linked assets. Certainly, with the Canadian vaccination effort proving lackluster relative to some of its G10 counterparts, there was at least one duly noted fundamental reasons for why the Canadian Dollar’s rally was troubled.

But among the CAD-crosses,despite turbulent price action. the major technical thresholds were never tripped. Now that risk appetite has returned with global equities turning higher, more gains may be ahead yet for the Loonie via major pairs like USD/CAD and CAD/JPY.

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CAD/JPY Rate Technical Analysis: Daily Chart (February 2020 to February 2021) (Chart 1)

CAD/JPY rates have continued higher with their bullish breakout, breaking through the 2020 high and thus the 0% Fibonacci retracement of the 2020 high/low range. But taking a step back, this is also the 61.8% Fibonacci retracement of the 2018 high/2020 low range. As a follow-on to the bullish breakout through the descending trendline from the January 2018, October 2018, and February 2020 highs, a move through the 61.8% retracement would be a very strong technical signal that a multi-year bottoming effort is in its infancy.

CAD/JPY rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is rising while above its signal line, while daily Slow Stochastics are holding overbought territory. The path of least resistance is higher so long as the daily 13-EMA is maintained.

USD/CAD Rate Technical Analysis: Daily Chart (February 2020 to February 2021) (Chart 2)

USD/CAD rates have turned lower from the March and October 2020 highs once more, but there is another technical level at work: the descending trendline from the January/September 2019 highs and September/November 2020 lows. It would appear that significant resistance has formed overhead, which has been buttressed by the rejection by the 38.2% Fibonacci retracement of the 2012 low/2016 high range at 1.2758.

Bearish momentum is gathering pace for USD/CAD rates again. The pair is below its daily 5-, 8-, 13-, and 21-EMA envelope, which is now in bearish sequential order. Daily MACD is declining below its signal line, but daily Slow Stochastics are still rising above their median line. A return back to the yearly low at 1.2468 is not out of the question.

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IG Client Sentiment Index: USD/CAD Rate Forecast (March 2, 2021) (Chart 3)

USD/CAD: Retail trader data shows 59.88% of traders are net-long with the ratio of traders long to short at 1.49 to 1. The number of traders net-long is 13.90% higher than yesterday and 21.72% lower from last week, while the number of traders net-short is 0.21% higher than yesterday and 63.73% higher 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.

Positioning is more net-long than yesterday but less net-long 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 Currency Strategist