Canadian Dollar Forecast: Oil Fueling Loonie’s Rise

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Canadian Dollar Outlook:

Loonie’s Run Fueled by Oil, Still

The continued power seen in power markets is offering air below the Loonie’s wings. With an increasing number of information suggesting that the COVID-19 omicron variant is gentle in comparison with prior iterations, considerations a couple of important international financial slowdown have pale away. Crude oil costs have benefited from the resurgent development expectations, climbing to their highest degree since November 16, 2021.

Concurrently, the energy-linked Canadian Dollar has adopted swimsuit. The Canadian financial system is very delicate to grease costs, insofar as power constitutes roughly 11% of GDP. It’s thus no shock that the sturdy correlation between crude oil costs and the Canadian Dollar has remained in place by way of the primary two weeks of 2022. The 20-day correlation between crude oil costs and USD/CAD is -0.86, whereas the 20-day correlation between crude oil costs and CAD/JPY is +0.93.

Further Canadian Dollar power is basically predicated on the continued sturdy efficiency in power markets – the most effective performing sector of the US S&P 500 within the early days of 2022.

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

CAD/JPY charges are on the verge of building a recent month-to-month and yearly excessive closing degree as bullish momentum continues to speed up. The pair stays above its day by day 5-, 8-, 13-, and 21-EMA envelope, having lately discovered assist on the day by day 8-EMA; the EMA envelope is in bullish sequential order. Daily MACD is trending larger above its sign line, whereas day by day Slow Stochastics have turned larger whereas in overbought territory – an indication of sturdy momentum. It stays the case that “CAD/JPY rates are still on course to return to their 2021 high at 93.02 in the coming weeks.”

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

Canadian Dollar Forecast: Oil Fueling Loonie’s Rise - Setups in CAD/JPY, USD/CAD

Last week it was famous that “with the pair back in the multi-month symmetrical triangle that governed price action for most of 2021, the near-term technical outlook has turned increasingly bearish.” Since then, USD/CAD charges have dropped to recent month-to-month and yearly lows, reaching ranges final seen in mid-November 2021.

Bearish momentum continues to assemble tempo, with USD/CAD charges beneath their day by day 5-, 8-, 13-, and 21-EMA envelope, which stays in bearish sequential order. Daily MACD has now crossed beneath its sign line whereas trending decrease, and day by day Slow Stochastics have dipped into oversold territory. Whereas final week it was noticed that “a deeper setback below 1.2600 may soon transpire,” with USD/CAD charges buying and selling at 1.2600 on the time of writing, an additional fall beneath 1.2500 seems to be on deck.

IG Client Sentiment Index: USD/CAD Rate Forecast (January 11, 2022) (Chart 3)

Canadian Dollar Forecast: Oil Fueling Loonie’s Rise - Setups in CAD/JPY, USD/CAD

USD/CAD: Retail dealer information reveals 68.84% of merchants are net-long with the ratio of merchants lengthy to quick at 2.21 to 1. The variety of merchants net-long is 0.13% decrease than yesterday and 48.61% larger from final week, whereas the variety of merchants net-short is 7.96% larger than yesterday and 22.60% decrease from final week.

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

Positioning is much less net-long than yesterday however extra net-long from final week. The mixture of present sentiment and up to date adjustments offers us an additional blended USD/CAD buying and selling bias.

— Written by Christopher Vecchio, CFA, Senior Strategist

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