Canadian dollar technical analysis: liquidation may be over

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Canadian dollar outlook:

  • The USD / CAD and CAD / JPY rates have reached significant technical levels which suggest that the loonie collapse may be complete.
  • As market participants begin to climb the wall of worry that is the delta variant, growth sensitive assets could quickly come back in favor.
  • According to IG Customer Sentiment Index, USD / CAD rates have a mixed short-term bias.

Don’t call it a comeback

It’s no secret that the Canadian dollar is struggling. As the second half of July approaches, the sharp weakness in oil prices weighed on the loonie, which is among the major currencies most sensitive to growth. Coupled with rising fears over delta variants earlier this week, the Canadian dollar hit multi-month lows against the Japanese yen and the US dollar.

But now that some sober thoughts are regaining control, there’s reason to believe that the delta variant’s surge won’t cause lockups again. Instead, this is just the new wall of worry for markets to climb, in a very ‘golden loop’ sense: this is enough concern to maintain the stimulus, but not enough concern to smack. the door to Canadians or the American economies.

As a result, it may be that with the CAD / JPY and USD / CAD rates reaching significant technical levels, the Loonie collapse may have reached its stopping point.

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

In the previous update last week, it was noted that “a deeper pullback is possible below 86.00 in the coming sessions.CAD / JPY rates fell to a new monthly low yesterday, plunging to the April low of 85.42. But not crossing the April swing low is an important development, alongside a rebound above the 50% Fibonacci retracement of the late January low / high range at 86.09. It’s too early to say the turning point has come given the relationship between CAD / JPY rates and its multitude of indicators, but we have early evidence that “the lowest” may have been found.

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

Canadian Dollar Technical Analysis: Sale May Be Over - CAD / JPY, USD / CAD Configurations

Last week it was noted that “further gains to the April high (bearish key reversal high) at 1.2654 look plausible before resistance is found”. USD / CAD rates broke that level, trading above 1.2800 yesterday for the first time since early February. In doing so, USD / CAD rates encountered two critical resistance levels which, if there was ever a place for ‘the top’ to be found, that would be it.

The downtrend line from the January 2016 high and September 2020 low proved formidable support in September and November 2020, showing itself as resistance in December 2020. At the same time, the rise in USD / CAD rates. ‘is reversed at the 38.2% Fibonacci retracement of 2012 low / 2016 high range at 1.2758. Further advances above 1.2800 would negate the prospect that the sale of the Canadian dollar is over.

IG Client Sentiment Index: USD / CAD rate forecast (July 20, 2021) (Chart 3)

Canadian Dollar Technical Analysis: Sale May Be Over - CAD / JPY, USD / CAD Configurations

USD / CAD: Retail traders data shows 49.35% of traders are net long with a ratio of short / long traders of 1.03 to 1. The number of net long traders is 19.86% higher than ‘yesterday and 23.13% lower than last week, while the number of net-short traders is 5.53% higher than yesterday and 39.80% higher than last week.

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

The positioning is less net-short than yesterday but more net-short than last week. The combination of current sentiment and recent changes gives us another USD / CAD blended trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

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