Canadian Dollar Technical Analysis: CAD/JPY, USD/CAD Rates Outlook

Canadian Dollar Outlook:

• The general risk-off tone in financial markets has weighed on the Canadian dollar in recent days.
• The USD/CAD rates are moving towards their annual high, while the CAD/JPY rates are at their lowest level since 5 September.
• However, according to IG Client Sentiment IndexUSD/CAD rates are bullish in the near term.

Strong USD, Softening Oil Prices Weighing

The Canadian dollar has rallied over the past few days, which is more broadly in line with risk appetite. Rapidly rising Fed rate hike barriers have pushed up the US dollar (via the DXY Index) and US Treasury yields, while concerns of a global recession weighed on energy prices. The net result has been that the USD/CAD rates are pushing up to their yearly highs, while the CAD/JPY rates have fallen to their lowest levels in a week.

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

CAD/JPY rates pushed through resistance around 107.50 in early September, before turning lower yesterday, setting a new annual high at 110.52. The pullback so far is the minimum, the pair has returned to the levels seen on September 5. The momentum is on the downside, with the CAD/JPY rate below their daily 5- and 8-EMA, but still above their daily 13- and 21-EMA. , while the EMA envelope is in a bullish order. The daily MACD continues to move above its signal line, although a bearish crossover is more likely, and the daily slow stochastics is in overbought territory, although an exit is imminent. The prior yearly high area between the daily 21-EMA and 107.46/65 is the first support on the downside.

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

In the former note at the end of August, it was observed that “noted by continued decline in US equity markets, rising US 2-year yields and a higher VIX, there is a chance for USD/CAD rates to reclaim their annual high above 1.3200 in short order.” can help pave the way.” Since then, including today, the pair has traded above 1.3200 on several occasions, but has not yet reached the annual high of 1.3224. The near-term bias appears to be on the upside, breaking the ascending triangle resistance that has been forming since April. USD/CAD rates are still above their daily EMA envelope, which is in bullish order. The Daily MACD is moving above its signal line, while the Daily Slow Stochastics is trending towards the overbought area. The yearly high of 1.3224 is still in focus.

IG Client Sentiment 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 traders to long traders at 2.05 to 1. While the number of net-short traders is 41.46% higher than yesterday and 0.58% higher than last week.

We generally take the opposite view of crowd sentiment, and the fact that traders are pure-short suggests that USD/CAD prices may continue to rise.

Traders are more pure than yesterday and last week, and the combination of current sentiment and recent changes gives us a strong USD/CAD – opposite to the bullish trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist