Canadian Dollar Forecast: Oil Prices Remain in Driver’s Seat

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Canadian Dollar Outlook:

  • Continued good points by crude oil costs are serving to propel the Canadian Dollar initially of 2022.
  • CAD/JPY charges are actually again to ranges final seen in November 2021, whereas USD/CAD charges have reentered a multi-month symmetrical triangle that ruled value motion for many of 2021.
  • According to the IG Client Sentiment Index, USD/CAD charges now have a bullish bias within the near-term.

Yields, Oil Continuing to Fuel Loonie Strength

A standard phrase heard on buying and selling desks this time of yr is “just because the year ends, doesn’t mean the trend bends.” In this case, the robust, optimistic relationship between the Canadian Dollar and crude oil costs that continued on the finish of 2021 has continued into 2022. The 20-day correlation between crude oil costs and USD/CAD is -0.51, whereas the 20-day correlation between crude oil costs and CAD/JPY is +0.86. The continued push larger by oil costs solely serves to learn the Canadian Dollar, whereas rising long-end bond yields across the globe have duly sapped demand for protected haven currencies.

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

CAD/JPY charges are persevering with to point out indicators of gathering bullish momentum, with the pair extending additional above their each day 5-, 8-, 13-, and 21-EMA envelope, reaching the preliminary upside goal outlined final week when it was famous that “further gains are anticipated into the early-December high at 90.37 in the near-term.” The transient drop on the primary buying and selling day of 2021 noticed charges rebound on the 50% Fibonacci retracement of the 2015 excessive/2020 low vary at 90.16 earlier than rebounding. It stays the case “that a near-term bottom has finally been established.” CAD/JPY charges are nonetheless on track to return to their 2021 excessive at 93.02 within the coming weeks.

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

Canadian Dollar Forecast: Oil Prices Remain in Driver’s Seat - Setups in CAD/JPY, USD/CAD

In the prior replace it was famous that “USD/CAD rates have yet to emerge on the other side of their daily 21-EMA, which has as support over the past few trading days. Doing so would be a strong indication that the tide has finally turned.” Indeed, USD/CAD charges have dropped beneath their each day 21-EMA, treating the one-month transferring common as resistance upon the primary retest. With the pair again within the multi-month symmetrical triangle that ruled value motion for many of 2021, the near-term technical outlook has turned more and more bearish.

Momentum continues to speed up to the draw back, with USD/CAD charges beneath their each day 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD continues to development decrease, nearing a cross beneath its sign line, whereas each day Slow Stochastics are hovering simply above overbought territory. A deeper setback beneath 1.2600 could quickly transpire.

IG Client Sentiment Index: USD/CAD Rate Forecast (January 4, 2022) (Chart 3)

Canadian Dollar Forecast: Oil Prices Remain in Driver’s Seat - Setups in CAD/JPY, USD/CAD

USD/CAD: Retail dealer information exhibits 53.50% of merchants are net-long with the ratio of merchants lengthy to brief at 1.15 to 1. The variety of merchants net-long is 11.89% decrease than yesterday and 11.89% decrease from final week, whereas the variety of merchants net-short is 35.60% larger than yesterday and 1.13% decrease from final week.

We sometimes take a contrarian view to crowd sentiment, and the very fact merchants are net-long suggests USD/CAD costs could proceed to fall.

Yet merchants are much less net-long than yesterday and in contrast with final week. Recent adjustments in sentiment warn that the present USD/CAD value development could quickly reverse larger regardless of the very fact merchants stay net-long.

— Written by Christopher Vecchio, CFA, Senior Strategist

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