Canadian Dollar Forecast: Primed for More Gains?

Canadian Dollar Forecast Overview:

With the equity market rally stalling, risk appetite has waned as the prospect of another round of US fiscal stimulus before the November 3 elections has dimmed. Alongside the deterioration in risk appetite, the Canadian Dollar rally has hit pause.
Relatively quiet Canadian economic calendar through the end of October will leave CAD-crosses particularly exposed to broader risk trends, especially those in stocks and oil markets.
According to the IG Client Sentiment Index, USD/CAD rates have a bullish trading bias.

Canadian Dollar Maintaining Strength

While the Canadian Dollar has been enjoying a solid month of October, the past few days have proven rocky. Inconsistent news flow around US fiscal stimulus talks have hampered risk appetite, and amid an otherwise quiet Canadian economic calendar, the Loonie has proved hamstrung. With a relatively quiet Canadian economic calendar through the end of October, CAD-crosses will remain particularly exposed to broader risk trends, especially those in stocks and oil markets – including US fiscal stimulus news developments.

Bank of Canada Holds its Course

No reason to beat around the bush: nothing has changed for the Bank of Canada. Our expectation remains well-moored. “While the Canadian economy continues to show signs of progress, it must be considered that 20% of Canadian GDP is tied to economic activities with the US; as long as the world’s largest economy continues to struggle to contain the COVID-19 outbreak, the Canadian economy may find difficulty reaching its full potential. As such, it still holds that the Bank of Canada still sees too much uncertainty to make any significant changes in the near-term.”

Bank of Canada Interest Rate Expectations (October 22, 2020) (Table 1)

Bank of Canada interest rate expectations have continued to remain stable for the past several months. In mid-August, there was a 5% chance of a 25-bps rate hike through December 2020; now, there is a 2% chance of a 25-bps rate cut through December 2020. To this end, it is still the case that no rate moves are expected through July 2021.

USD/CAD Rate Technical Analysis: Daily Chart (October 2019 to October 2020) (Chart 1)

Despite trading higher in recent days, USD/CAD rates are still below their daily 5, 8-, 13-, and 21-EMA envelope, which is still in bearish sequential order. Daily MACD is trending lower below its signal line, while Slow Stochastics are falling into oversold territory. Given that the uptrend from the September swing lows has been broken, USD/CAD rates still have potential to trade lower. The September 30 bearish engulfing bar high at 1.3400 would be key resistance to discern whether or not the potential for further losses remains.

USD/CAD Rate Technical Analysis: Weekly Chart (October 2019 to October 2020) (Chart 2)

Big picture: There may no longer be a longer-term upside bias in USD/CAD rates as this narrative is under threat given the breakdown through the rising uptrend from the September 2012 and September 2016 lows. The longer-term view remains a bearish double top.

IG Client Sentiment Index: USD/CAD Rate Forecast (October 22, 2020) (Chart 3)

USD/CAD: Retail trader data shows 66.24% of traders are net-long with the ratio of traders long to short at 1.96 to 1. The number of traders net-long is 3.62% lower than yesterday and 19.14% lower from last week, while the number of traders net-short is 23.65% higher than yesterday and 71.03% 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. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse higher despite the fact traders remain net-long.

CAD/JPY Rate Technical Analysis: Daily Chart (October 2019 to October 2020) (Chart 4)

CAD/JPY rates have formed into a new symmetrical triangle, dating back to mid-May; this new perspective trumps the prior symmetrical triangle in place from the February high. To this end, as a pair sitting in the middle of a consolidation, CAD/JPY rates are unattractive from a variety of angles: range traders, breakout traders, and momentum traders are likely to be discouraged in the very near-term.

CAD/JPY rates below their daily 5-, 8-, 13-, and 21-EMA envelope, which is still in bullish sequential order. Daily MACD is trending lower albeit at the signal line, while Slow Stochastics have dropped towards their median line. Patience is required; the sidelines look like a reasonable place from this strategist’s perspective.