Canadian dollar outlook:
- The general risk-averse tone in financial markets has weighed on the Canadian dollar in recent days.
- USD/CAD rates are pushing towards their yearly highs, while CAD/JPY rates are at their lowest level since September 5th.
- However, according to the IG Customer Opinion IndexUSD/CAD rates have a short-term bullish bias.
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A strong dollar and weak oil prices weigh
The Canadian dollar has fallen over the past few days, in line with broader risk appetite. Rapidly rising Fed rate hike ratings lifted the US dollar (via the DXY Index) and US Treasury yields, while the proliferation of global recession fears weighed on energy prices . The net result has been USD/CAD rates pushing their yearly highs, while CAD/JPY rates have fallen to their lowest level in over a week.
CAD/JPY Rate Technical Analysis: Daily Chart (September 2021 to September 2022) (Chart 1)
CAD/JPY rates breached resistance around 107.50 in early September, setting a new yearly high at 110.52 yesterday before falling. The pullback has been minimal so far, with the pair returning to the levels seen on September 5th. Momentum is beginning to erode, with CAD/JPY rates below their daily 5 and 8 EMAs, but still above their daily 13 and 21 EMAs, while the envelope EMA remains sequentially bullish. The daily MACD continues to trend higher above its signal line although a bearish crossover becomes more likely, and the daily Slow Stochastics hold in overbought territory although an exit is approaching. The daily 21-EMA and former yearly high between 107.46/65 is the first downside support.
USD/CAD Rate Technical Analysis: Daily Chart (May 2021 to September 2022) (Chart 2)
In the previous note at the end of August, it was observed that “the continued deterioration in US equity markets, noted by rising US 2-year yields and a high VIX, could help pave the way for USD/CAD rates to retest their annual high above of 1.3200 in the short term”. Since then, including today, the pair has traded above 1.3200 on several occasions but has yet to hit the yearly high at 1.3224. Having broken above the resistance of the ascending triangle that has been forming since April, the short-term bias appears to be to the upside. USD/CAD rates are still above their daily envelope EMA, which is in bullish sequential order. The daily MACD is trending higher above its signal line, while the daily Slow Stochastic is trending towards overbought territory. The yearly high at 1.3224 remains in focus.
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IG Customer Confidence Index: USD/CAD Rate Forecast (September 14, 2022) (Chart 3)
USD/CAD: Retail trader data shows 32.82% of traders are net long with a ratio of short to long traders of 2.05 to 1. The number of net long traders is 22.73% lower than yesterday and 9.89% lower than last week, while net-short trader count is 41.46% higher than yesterday and 0.58% higher than this week last.
We generally take a contrary view to the sentiment of the crowds, and the fact that traders are net short suggests that USD/CAD prices may continue to rise.
Traders are even sharper than yesterday and last week, and the combination of current sentiment and recent shifts gives us a stronger USD/CAD bullish contrarian trading bias.
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— Written by Christopher Vecchio, CFA, Senior Strategist