Canadian dollar outlook:
- The Bank of Canada has refrained from changing rates or the pace of its quantitative easing program, which comes as no surprise given recent political events and slowing economic data due to soaring infections delta variant of COVID-19.
- USD / CAD rates are set to move back above a multi-year trendline, while CAD / JPY rates move away from triangular resistance.
- According to IG Customer Sentiment Index, USD / CAD rates have a bullish bias.
Oil does not fuel the loonie
The Canadian dollar has been experiencing more and more volatility in recent days, which is not a good sign for Loonie bulls. USD / CAD 20-day ATR is now 91 pips, more than 36% above its August low, while CAD / JPY 20-day ATR is 70 pips , up 12%. Higher volatility generally corresponds to the weakness of the loonie, which remains on a weak technical basis relative to its Japanese yen and US dollar counterparts.
Basically, the Bank of Canada’s decision to refrain from changing interest rates or changing the pace of its quantitative easing program was predicted in advance, which is not surprising given that September 20 federal election and rise in COVID-19 infections who undermined it Canadian economy. Until either of these concerns is clarified, even gains in oil prices may not be enough to restore confidence in the Canadian dollar in the near term.
CAD / JPY technical analysis: daily chart (September 2020 to September 2021) (Chart 1)
August 26, it was noted that “ssupport for the symmetrical triangle has been broken, and price action today produces a bearish outer engulfing bar (or bearish key reversal) on the daily period. Taking a step back, it is also possible that the CAD / JPY is carving out a right shoulder in a head-to-shoulder pattern, which would ultimately aim for a move closer to 80.00. More disadvantages seem plausible from here.
No resolution of the bearish or bullish scenarios was discerned, justifying a different approach to the charts. Instead, it appears that a descending triangle – with resistance measured against the swinging highs of June and July 2021 and support measured against the lows of April and July 2021 – has formed below the line. downtrend of October 2007 (historic high) and highs of December 2014, leaving open the possibility of a further short-term decline.
The momentum becomes more bearish on the daily calendar. CAD / JPY rates slide below their daily envelope of 5, 8, 13 and 21 EMA, which begins to line up in a bearish sequential order. The MACD’s daily advance has never cleared its signal line, while the Daily Slow Stochastic is about to break out of overbought territory with a clear bearish divergence from the price action. Another drop to and below 85.00 could soon occur.
Technical analysis of the USD / CAD rate: daily chart (September 2020 to September 2021) (Chart 2)
While there has been a lot of choppy price action over the past couple of weeks, USD / CAD rates are essentially where they were. when we last discussed the pair on August 26th. The pair continues to linger near the descending trendline of the January 2016 high and September 2020 low, while flirting with a break above the ascending trendline of the June swing lows and August 2021.
The daily calendar shows that a shooting star is forming after the BOC rate decision, but with more information on that tomorrow when BOC Governor Tiff Macklem holds a press conference, it is too early to say that the high of the month has been reached so far.
IG Client Sentiment Index: USD / CAD rate forecast (September 9, 2021) (Chart 3)
USD / CAD: Retail traders data shows 63.31% of traders are net long with a ratio of long / short traders at 1.73 to 1. The number of net long traders is 12.17% lower than that of yesterday and 24.22% compared to last week. while the number of net-short traders is 15.78% higher than yesterday and 31.40% higher than last week.
We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that USD / CAD prices may continue to decline.
However, traders are shorter than yesterday and compared to last week. Recent sentiment shifts are warning that the current USD / CAD price trend may soon reverse to the upside despite traders staying net long.
— Written by Christopher Vecchio, CFA, Senior Strategist