Canadian dollar forecast: oil prices remain the main driver

Canadian dollar outlook:

  • The continued rebound in crude oil prices gave the loonie a boost.
  • CAD / JPY rates recently traded above their daily 21-EMA, while USD / CAD rates have yet to drop below their one-month moving average.
  • According to IG Customer Sentiment Index, USD / CAD rate now have a bearish short-term bias.

Oil supply loonie gains

Strength in energy markets helped propel the Canadian dollar higher at the end of the year. Energy, which accounts for about 11% of Canadian GDP, has a huge influence on the loonie, so it’s no surprise that the strong rebound in crude oil prices over the past week has turned into rebounds by the loonie. main cross CAD. And with risk appetite having improved dramatically in recent days, safe haven counterparties like the Japanese yen and the US dollar are fading, allowing the strength of the CAD to shine in pairs like CAD / JPY rates and USD / CAD.

CAD / JPY technical analysis: daily chart (December 2020 to December 2021) (Chart 1)

CAD / JPY continued to rise from the 61.8% Fibonacci retracement of the lower August / October range of 87.86, eventually reaching a higher move through the daily 21-EMA – the moving average. of a month – at the end of last week. Likewise, the pair may also have climbed above the descending trendline from the October and November highs, suggesting that a short-term low has finally been established.

The bullish momentum continues to improve. The Daily MACD is poised to climb above its signal line as the Daily Slow Stochastic has entered overbought territory. CAD / JPY rates are above their daily envelope of 5, 8, 13 and 21 EMA, which is in full bullish sequential order. Further gains are expected towards the early December high of 90.37 in the near term.

Technical analysis of the USD / CAD rate: daily chart (December 2020 to December 2021) (Chart 2)

Canadian Dollar Forecast: Oil Prices Remain Key Factor - CAD / JPY, USD / CAD Configurations

In the previous update it was noted that “if crude oil prices can reach 73.34, however, that would be a favorable sign that the Loonie rally may still have room to play”. Crude oil prices reached 73.34, suggesting that further weakness in the USD / CAD may be on the way. Unlike CAD / JPY rates, however, USD / CAD rates have yet to emerge on the other side of their daily 21-EMA, which has served as support over the past few trading days. It would be a strong indication that the tide has finally turned.

For now, the bearish momentum is accelerating, although more slowly than the bullish momentum has emerged from CAD / JPY rates. The daily MACD continues its downtrend, but is not yet close to going below its signal line. Daily Slow Stochastics are falling, but not yet below their midline. And the USD / CAD rates are in the middle of their daily EMA envelope, which is not yet in a bearish sequential order. Ultimately, if one is looking for greater CAD strength in the short term, CAD / JPY rates have a more favorable pattern than USD / CAD rates.

IG Client Sentiment Index: USD / CAD rate forecast (December 29, 2021) (Chart 3)

Canadian Dollar Forecast: Oil Prices Remain Key Factor - CAD / JPY, USD / CAD Configurations

USD / CAD: Retail traders data shows 56.50% of traders are net long with a ratio of long / short traders at 1.30 to 1. The number of net long traders is 2.80% lower than that of yesterday and 39.70% higher than that of last week. while the number of net-short traders is 3.39% lower than yesterday and 44.63% lower 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.

Traders are longer than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD / CAD counter-current trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist

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