Ready for Liftoff? Levels for CAD/JPY & USD/CAD Rates

Canadian Dollar Forecast Overview:

After a rocky September, both CAD/JPY and USD/CAD rates are on the cusp of breaking in favor of more Canadian Dollar strength alongside crude oil prices and equity markets.
Canadian Dollar event risk rises at the end of the week, with the release of the September Canada jobs report on Friday, October 9.
According to the IG Client Sentiment Index, USD/CAD rates have a bearish trading bias.

Recommended by Christopher Vecchio, CFA

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Canadian Dollar Readying for Liftoff?

The Canadian Dollar proved weaker in September, the first time since March that USD/CAD rates posted a month-over-month gain. But the start of October has already proven beneficial for the Loonie, with energy markets and equity markets rallying alongside optimism that a new fiscal stimulus package will be coming from the United States. More evidence that the Canadian economy is weathering the coronavirus pandemic with a strong September Canada jobs report is due at the end of the week, and so long as general risk appetite continues to improve, the Canadian Dollar may be well-positioned to advance versus the Japanese Yen and Us Dollar.

Bank of Canada Maintains Flight Path

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 5, 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 7% 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)

The USD/CAD rate rally stalled ahead of the late-February swing high (which proved to break with a gap higher in mid-March), noted by several daily inverted hammers last week. Now, USD/CAD rates are below their daily 5, 8-, 13-, and 21-EMA envelope, which is not quite yet in bearish sequential order. Daily MACD is trending lower at its signal line, while Slow Stochastics are falling towards their median line. If the uptrend from the September swing lows is broken, USD/CAD rates could reverse quickly. The September 30 bearish engulfing bar high at 1.3250 would be key resistance to discern whether or not the potential for further losses remains.

IG Client Sentiment Index: USD/CAD Rate Forecast (October 5, 2020) (Chart 2)

USD/CAD: Retail trader data shows 66.83% of traders are net-long with the ratio of traders long to short at 2.01 to 1. The number of traders net-long is 6.95% higher than yesterday and 26.78% higher from last week, while the number of traders net-short is 1.82% higher than yesterday and 9.68% 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.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.

CAD/JPY Rate Technical Analysis: Daily Chart (October 2019 to October 2020) (Chart 3)

CAD/JPY rates are risen back to the rising trendline from the May and July swing lows, having found support at former triangle resistance from the February and June highs. CAD/JPY has seen bearish momentum ease, with CAD/JPY rates above their daily 5-, 8-, 13-, and 21-EMA envelope, which has only recent lost bullish sequential order. Daily MACD is trending higher albeit below the signal line, while Slow Stochastics have risen through their median line. Gains through 80.000 this week would be a strong sign that CAD/JPY rates have indeed made a meaningful turn higher.