Canadian dollar outlook:

• The Canadian dollar has benefited enormously from the sustained rise in energy prices as well as a rebound in risk appetite over the past two weeks.
• USD/CAD rates broke through the ascending triangle support, while CAD/JPY rates hit a key multi-year Fibonacci retracement.
• According to IG Customer Opinion IndexUSD/CAD rate have a mix short-term bias.

Loonie taking off

Like so many other currencies whose countries export commodities, the Canadian dollar has benefited enormously from an environment characterized by higher prices for base metals and energy. And as a relatively higher yielding currency, the recent rebound in risk appetite has reinvigorated the Loonie as a carry prospect.

USD/CAD’s losses against an otherwise resilient US dollar bode well for the Canadian dollar, not to mention the outstanding performance of the CAD/JPY pair over the past two weeks. While these bullish moves in the CAD may be a bit “long in the tooth,” the technical chart suggests that any opportunity to get long in the Canadian dollar on pullbacks is the preferred near-term outcome.

CAD/JPY Rate Technical Analysis: Weekly Chart (August 2014 to March 2022) (Chart 1)

After trading in a symmetrical triangle that had formed since September 2021, CAD/JPY rates have exploded over the past three weeks, reaching their highest level since June 2015. These gains were in line with expectations at more long-term, as it has been repeatedly noted over the past few months that “as the previous move was higher, the ultimate resolution of the symmetric triangle is seen for an upside breakout – consistent with the broader rally above the descending trendline from November 2007 (all-time high) and the highs from December 2014.

The pair is above its daily 5, 8, 13, and 21-EMA envelope, as well as its weekly 4, 8, and 13-EMA envelope, both in bullish sequential order. The weekly MACD continues to rise above its signal line, while the weekly slow stochastic remains in overbought territory. After hitting the 76.4% Fibonacci retracement of the 2015 high/2020 low range, CAD/JPY rates may experience a short-term pullback that would provide an opportunity to look long again given the structure. momentum.

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

Overall, USD/CAD rates had been trading in an ascending triangle formation from June 2021. Over the past week, the pair has crossed the rising trend line from the lows of June 2021, October 2021 and January 2022; the retest of former support turned out to be resistance yesterday. It stands to reason that the technical bias has moved from neutral to bearish for the foreseeable future.

The bearish momentum is strong. USD/CAD rates are below their daily 5, 8, 13, and 21-EMA envelope, which is in bearish sequential order. The daily MACD continues to decline below its signal line, while the daily Slow Stochastic remains in oversold territory. The short-term bearish bias would remain valid until USD/CAD rates close above their daily 21-EMA, which they have not done since March 15th.

IG Customer Confidence Index: USD/CAD Rate Forecast (March 29, 2022) (Chart 3)

USD/CAD: Retail trader data shows 74.16% of traders are net long with a ratio of long to short traders of 2.87 to 1. The number of net long traders is 10.01% higher than yesterday’s and 2.41% lower than last week’s, while the number of net-short traders is 10.07% lower than yesterday and 1.11% lower than this week last.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net buyers suggests that USD/CAD prices may continue lower.

Positioning is net-longer than yesterday but less net-longer since last week. The combination of current sentiment and recent shifts gives us another mixed USD/CAD trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist