Canadian Dollar Outlook:
- Weakness in CAD-crosses is setting in as energy prices struggle to continue their rebound.
- Ahead of the Federal Reserve meeting this week, both CAD/JPY and USD/CAD rates may take on a ‘risk off’ tone.
- According to the IG Client Sentiment Index, USD/CAD rates have a mixed bias in the near-term.
Rejection at Familiar Levels
The rebound the Canadian Dollar enjoyed at the start of December has proved short lived. USD/CAD rates fell back to a multi-year trendline that quickly acted as support, while CAD/JPY rates returned back to former range support before treating it as resistance. The reversals seen come in tandem with crude oil prices struggling to regain their uptrend from the November 2020 and August 2021 lows, evidence that one of the main drivers of the Canadian Dollar is a headwind in the short-term. With the Federal Reserve policy meeting set for midweek, a ‘risk off’ tone permeating the market may continue to make trading difficult for the major CAD-crosses in the coming days.
CAD/JPY Rate Technical Analysis: Daily Chart (December 2020 to December 2021) (Chart 1)
CAD/JPY rates rebounded from the descending trendline from the October 2007 (all-time high) and December 2014 highs last week, trading back up to symmetrical triangle support in place during October and November. But former support has become resistance, with an evening star candlestick cluster forming, indicating a near-term top. Follow through to the downside suggests a return back to the October 2007 and December 2014 trendline is likely.
Momentum has turned lower with CAD/JPY rates below their daily 5-, 8-, 13-, and 21-EMA envelope. Daily MACD has turned lower again while below its signal line, while daily Slow Stochastics are dropping below their median line. Further losses towards the 61.8% Fibonacci retracement of the August low/October range near 87.86 may transpire over the next few days.
USD/CAD Rate Technical Analysis: Daily Chart (December 2020 to December 2021) (Chart 2)
USD/CAD rates rebounded from the descending trendline from the January 2016 high and September 2020 low last week, and have once again returned above the descending trendline from the August and September swing highs. What appeared to have been a false bullish breakout now appears back in play, with a move towards the December high at 1.2854 in the coming days possible. USD/CAD rates are back above their daily EMA envelope, while daily Slow Stochastics have turned higher through their median line and daily MACD on the cusp of issuing a buy signal while above its signal line.
IG Client Sentiment Index: USD/CAD Rate Forecast (December 13, 2021) (Chart 3)
USD/CAD: Retail trader data shows 50.88% of traders are net-long with the ratio of traders long to short at 1.04 to 1. The number of traders net-long is 11.84% higher than yesterday and 10.26% higher from last week, while the number of traders net-short is 21.33% higher than yesterday and 3.29% lower 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 less net-long than yesterday but more 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 Strategist