Canadian Dollar Technical Analysis: CAD/JPY, USD/CAD Rates Outlook

Canadian Dollar Outlook:

• CAD/JPY rates continue to consolidate within the confines of a symmetrical triangle.
• USD/CAD rates appeared to be breaking below neckline support of a head and shoulders pattern, although the move was reversed today.
• However, according to the IG Client Sentiment Index, USD/CAD rates have a mixed bias in the near-term.

Loonie Trying to Liftoff

The Canadian Dollar had a strong run at the end of last week and the beginning of this one as a blowout October Canada jobs report sent Bank of Canada rate expectations higher. Although the BOC had previously signaled it was nearing the end of frontloading interest rate hikes, market participants now believe that additional tightening is on the horizon, to the tune of 50- or 75-bps. But weakness in energy prices coupled with a retrenchment in risk appetite generally (cryptocurrencies, stocks) has proved to put the brakes on the burgeoning Loonie strength. The Canadian Dollar sits in a bit of a no man’s land as we cross into the second half of the week.

CAD/JPY Rate Technical Analysis: Daily Chart (November 2021 to November 2022) (Chart 1)

Continuing to consolidate within a symmetrical triangle that began to form in August, CAD/JPY rates have a neutral momentum profile. The pair is above its daily 5-, 8-, 13-, and 21-EMAs, and while the EMA envelope is in bullish sequential order, the gap between the daily 5- and 21-EMAs is less than 40-pips. Daily MACD is tilting lower just above its signal line, but daily Slow Stochastics are holding flat near their median line. CAD/JPY rates have not done much in recent weeks, and that appears to be the trajectory for the foreseeable future.

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

USD/CAD rates appear to have formed a head and shoulders pattern, breaking the neckline yesterday. But a lack of follow through and a reversal back above the neckline have put the bearish breakout opportunity on hold. Momentum remains bearish, as the daily EMA envelope is in bearish sequential order – although USD/CAD rates have moved above their daily 5-EMA. Daily MACD is descending through its signal line, while daily Slow Stochastics are in oversold territory. A move below the October low of 1.3596 would put the head and shoulders bearish breakdown back into focus; otherwise consolidation may be ahead.

IG Client Sentiment Index: USD/CAD Rate Forecast (November 9, 2022) (Chart 3)

USD/CAD: Retail trader data shows 49.33% of traders are net-long with the ratio of traders short to long at 1.03 to 1. The number of traders net-long is 8.51% lower than yesterday and 40.45% higher from last week, while the number of traders net-short is 2.58% lower than yesterday and 5.84% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/CAD prices may continue to rise.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist