Canadian Dollar Forecast Overview:
- The Canadian Dollar has held onto gains that have developed since financial markets crashing out in March, and may now be poised to build on said gains.
- Both CAD/JPY and USD/CAD rates have short-term momentum favoring more Canadian Dollar strength.
- According to the IG Client Sentiment Index, USD/CAD rates have a mixed trading bias in the near-term.
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Canadian Dollar Weathering the Storm
The Canadian Dollar, much like its Australian and New Zealand Dollar commodity currency counterparts, has been one of the better performing major currencies since financial markets crashed out in March 2020. But with central banks around the world providing ample liquidity to market participants, risk appetite has proven firm.
For the Canadian Dollar in particular, the idiosyncratic exposure to energy markets – 11% of Canadian GDP comes from the oil industry – has, to a certain degree, helped provide stability in recent weeks: thanks to aggressive supply production cut efforts by OPEC+ (among others), energy markets have proved buoyant.
Spot crude oil prices, trading at 40.67 at the time this report was written, have traded between 34.38 and 41.61 since May 29. To this end, with energy markets edging higher, the Canadian Dollar remains on firm footing, particularly in context of a central bank that is far less aggressive than the Federal Reserve.
BOC Interest Rate Cut Expectations Stable
Since the end of April, Bank of Canada interest rate expectations have been on a downward path, finding stability in a place where no rate moves are expected through the end of 2020. At the end of April, there was a 55% chance of a 25-bps interest rate cut in December 2020, according to Canada overnight index swaps.
But given gains in global equity and energy markets, a more supportive foundation has been laid for the Canadian Dollar. To this end, there is only an 1% chance of a 25-bps rate cut through December 2020, a sharp over the past two-plus months.
Bank of Canada Interest Rate Expectations (July 8, 2020) (Table 1)
It still holds that the Bank of Canada’s efforts along the interest rate front may be complete after all. While the BOC has cut the main interest rate to an all-time low of 0.25%, there have been some signals to the market that it may not be done yet (see: the two most recent BOC meetings). If the BOC does anything else, it may not be to cut interest rates to zero – or to negative territory.
USD/CAD Rate Technical Analysis: Daily Chart (July 2019 to July 2020) (Chart 1)
After achieving the bearish breakout target (1.3445) from the sideways range carved out between the end of March and the end of May (between 1.3855 and 1.4265), USD/CAD rates had steadily rebounded back towards critical former support, the March 16 bullish outside engulfing candle low at 1.3728. Support has become resistance, and combined with the 38.2% retracement of the 2016 high/2017 low range at 1.3686, a formidable ceiling has formed above current USD/CAD rates.
To this end, resistance in the 1.3686/3728 area has held, and the attempt higher at the end of June failed to produce a meaningful reversal. Similarly, the downtrend from the March and May swing highs remains intact.
At present time, USD/CAD rates are below their daily 5, 8-, 13-, and 21-EMA envelope – which is still in bearish sequential order. Daily MACD’s rise back towards its signal line has faltered, while Slow Stochastics have started to turn lower anew in bearish territory. Short-term momentum indicators suggest that more losses may be on the immediate horizon for USD/CAD rates.
USD/CAD Rate Technical Analysis: Weekly Chart (December 2016 to July 2020) (Chart 2)
While there may still be a longer-term upside bias in USD/CAD rates, this narrative is under threat given the potential for the pair to break the rising uptrend from the September 2012 and September 2016 lows. In the event that this trendline does give way over the coming sessions, the longer-term view would shift from a bullish symmetrical triangle to a bearish double top.
IG Client Sentiment Index: USD/CAD Rate Forecast (July 8, 2020) (Chart 3)
USD/CAD: Retail trader data shows 54.34% of traders are net-long with the ratio of traders long to short at 1.19 to 1. The number of traders net-long is 6.76% lower than yesterday and 3.06% lower from last week, while the number of traders net-short is 17.71% higher than yesterday and 14.72% 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.
Yet traders are less net-long than yesterday and compared with last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.
CAD/JPY Rate Technical Analysis: Daily Chart (July 2019 to July 2020) (Chart 4)
CAD/JPY rates have sustained their climb back above the rising trendline from the 2009 and 2016 lows, giving life to the idea that the symmetrical triangle, having formed between early-March and mid-May, was a significant bottoming effort. Retaking the 2019 low and symmetrical triangle swing highs near 78.50, and maintaining the move above 78.50, has given credence to the idea that the bottom is in.
While finding rejection near 82.00 at the start of June, CAD/JPY rates have since traded sideways for the past two weeks, carving out a range between 78.03 and 79.65. With CAD/JPY rates rising above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order, Slow Stochastics rising back towards overbought territory, and daily MACD turning higher above its signal line, suggests that price action may be building towards a bullish breakout attempt.
Given the range between 78.03 and 79.65 (163-pips), the topside measured move would call for gains towards 81.27.
CAD/JPY Rate Technical Analysis: Weekly Chart (June 2007 to July 2020) (Chart 5)
Bigger picture for CAD/JPY rates: while there is much ground to be made up to get back to the 2020 highs established in late-February, breaking out above 78.50 has seen CAD/JPY rates rise above the descending trendline from the October 2018 and July 2019 lows, offering another piece of evidence that a near-term low – if not the long-term bottom – may have been established.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist