Canadian Dollar Technical Analysis: The Sell-Off May Be Finished

Canadian Dollar Outlook:Both USD/CAD and CAD/JPY rates have reached significant technical levels that suggest the Loonie meltdown may be complete.As market participants begin to climb the wall of worry that is the delta variant, growth-sensitive assets could come back into favor quickly.According to the IG Client Sentiment Index, USD/CAD rates have a near-term mixed bias.Don’t Call it a ComebackIt’s no secret that the Canadian Dollar has been struggling. Moving into the second half of July, the acute weakness seen in oil prices has weighed down the Loonie, which is among the more growth-sensitive major currencies. Coupled with the surge in delta variant fears at the start of this week, the Canadian Dollar tripped to multi-month lows versus the Japanese Yen and the US Dollar.But now that some soberminded thinking is regaining control, there are reasons to believe that the delta variant surge will not provoke lockdowns anew. Instead, it’s just the new wall of worry for markets to climb, in a very ‘goldilocks’ sense of things: it’s enough of a concern to keep stimulus flowing, but not enough of a concern to slam the door shut on either the Canadian or US economies. Accordingly, it may be the case that with both CAD/JPY and USD/CAD rates having reached significant technical levels, the Loonie meltdown may have reached its stopping point. CAD/JPY Rate Technical Analysis: Daily Chart (June 2020 to July 2021) (Chart 1)In the prior update last week, it was noted that “a deeper setback is possible below 86.00 in the coming sessions.” CAD/JPY rates have dropped to a fresh monthly low yesterday, dipping all the way to the April swing low at 85.42. But failing to breach the April swing low is an important development, concurrent with a rebound above the 50% Fibonacci retracement of the late-January low/May high range at 86.09. It’s too soon to say that the turn has arrived given the relationship among CAD/JPY rates and its slew of indicators, but we have early evidence that ‘the low’ may have been found.USD/CAD Rate Technical Analysis: Daily Chart (June 2020 to July 2021) (Chart 2)Last week it was noted that “more gains into the April high (bearish key reversal high) at 1.2654 seem plausible before resistance is found.” USD/CAD rates overran this level, trading above 1.2800 yesterday for the first time since early-February. In doing so, USD/CAD rates ran into two critical resistance levels which, if there were ever a place for ‘the top’ to be found, this would be it.The descending trendline from the January 2016 high and September 2020 low proved formidable support in September and November 2020, proving itself as resistance in December 2020. Concurrently, the USD/CAD rate rally has reversed at the 38.2% Fibonacci retracement of the 2012 low/2016 high range at 1.2758. Further advances above 1.2800 would nullify the perspective that the Canadian Dollar sell-off has been completed.IG Client Sentiment Index: USD/CAD Rate Forecast (July 20, 2021) (Chart 3)USD/CAD: Retail trader data shows 49.35% of traders are net-long with the ratio of traders short to long at 1.03 to 1. The number of traders net-long is 19.86% higher than yesterday and 23.13% lower from last week, while the number of traders net-short is 5.53% higher than yesterday and 39.80% higher from last week.We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/CAD prices may continue to rise.Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.— Written by Christopher Vecchio, CFA, Senior Currency Strategist
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