Canadian dollar outlook:
- Major CAD crosses suggest the Loonie is likely for further weakness.
- USD/CAD rates are consolidating in an ascending triangle, while CAD/JPY rates are bouncing off channel support.
- However, according to the IG Customer Opinion IndexUSD/CAD rates have a short-term mixed bias.
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Commodities and risk appetite weigh on the loonie
The Canadian dollar hasn’t suffered as much as other commodity-linked currencies in recent weeks, but it’s far from solid ground. General risk appetite did not help the Canadian dollar, with global growth concerns picking up momentum early in 4Q’22, weighing on energy prices despite news of a cut of production by OPEC+. And with the Bank of Canada expected to slow its pace of rate hikes, the Canadian dollar is still likely to weaken further.
CAD/JPY Rate Technical Analysis: Daily Chart (October 2021 to October 2022) (Chart 1)
CAD/JPY rates actually turned out to be stronger than one would expect given the cross flows of assets. The pair found support at the uptrend support from the May and August lows, and bullish momentum began to build. CAD/JPY rates are above their daily EMAs of 5, 8, 13 and 21, but the envelope EMA is not yet in bullish sequential order. The daily MACD is holding just below its signal line, but the daily Slow Stochastic is advancing through its middle line. A move to new monthly highs is possible, but traders should be aware of the potential intervention from Japan’s Ministry of Finance which could send CAD/JPY rates down quickly.
USD/CAD Rate Technical Analysis: Daily Chart (October 2021 to October 2022) (Chart 2)
USD/CAD rates are consolidating in an ascending triangle formed over the past three weeks, and contextually after the previous bullish breakout, the ascending triangle should be viewed as an upward continuation effort. The pair is still above its daily envelope EMA, which is in a bullish sequential order. The daily MACD is trending higher above its signal line, while the daily Slow Stochastic remains in overbought territory. A break of the October high at 1.3855 would suggest a break up has begun.
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IG Customer Confidence Index: USD/CAD Rate Forecast (October 12, 2022) (Chart 3)
USD/CAD: Retail trader data shows 32.50% of traders are net long with a ratio of short to long traders of 2.08 to 1. The number of net long traders is 1.22% higher than yesterday and 32.61% lower than last week, while the number of net-short traders is 5.33% lower than yesterday and 2.18% higher than last week. last week.
We generally take a contrary view to the sentiment of the crowds, and the fact that traders are net short suggests that USD/CAD prices may continue to rise.
Positioning is less net-short than yesterday but more net-short since last week. The combination of current sentiment and recent shifts gives us another mixed USD/CAD trading bias.
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— Written by Christopher Vecchio, CFA, Senior Strategist