Canadian Dollar Outlook:
- The Canadian Dollar has proved within the week following the most important Bank of Canada charge hike in historical past.
- CAD/JPY charges are within the midst of a bullish breakout from a symmetrical triangle, whereas USD/CAD charges proceed to trade decrease from vital resistance.
- According to the IG Client Sentiment Index, USD/CAD charges have a combined bias within the near-term.
Hawkish BOC, ‘Risk-On’ Supportive
The Bank of Canada’s historic charge hike final week, the primary 100-bps hike in historical past and the most important since August 1998 (75-bps), has helped the Canadian Dollar stage a rally by the center of July. Whether or not the BOC retains its hawkish bias is one other query, nevertheless, as policymakers have indicated that they’re front-loading financial tightening.
For the near-term, not less than, with world equity markets persevering with to rally and (relative) stability in power markets, the Canadian Dollar is on steady sufficient footing to proceed to construct on its sturdy efficiency in current days. CAD/JPY charges are within the midst of a bullish breakout from a symmetrical triangle, whereas USD/CAD charges proceed to trade decrease from vital resistance carved out in current months.
CAD/JPY Rate Technical Analysis: Daily Chart (July 2021 to July 2022) (Chart 1)
Ahead of the symmetrical triangle breakout final week, it was famous that “the technical posture remains bullish. The aforementioned range called for a measured move higher above 108.00, which has not yet been achieved, thus exists the potential for another swing higher before exhaustion transpires. A move back above the June high at 107.21 would offer a strong confirmation signal that the next leg higher has commenced, targeting the 100% Fibonacci extension of the March 2022 low/April 2022 high/May 2022 low range at 111.09.”
The pair stays above its day by day 5-, 8-, 13-, and 21-EMA envelope, which continues to be in bullish sequential order. Daily MACD continues to be trending greater above its sign line, and day by day Slow Stochastics are holding in overbought territory. With 107.21 damaged to the upside, CAD/JPY charges stay on monitor to succeed in 111.09.
USD/CAD Rate Technical Analysis: Daily Chart (June 2021 to July 2022) (Chart 2)
In early-July it was famous that “a move below the daily 5-EMA and former resistance around 1.2950 would suggest a short-term drop towards 1.2800 is in play.” USD/CAD charges are seeing bearish momentum construct, with the pair beneath its day by day EMA envelope, which is beginning to align in bearish sequential order. Daily MACD continues to say no albeit nonetheless above its sign line, whereas day by day Slow Stochastics have reached oversold territory. The near-term trajectory in the direction of 1.2800 stays on monitor.
IG Client Sentiment Index: USD/CAD Rate Forecast (July 21, 2022) (Chart 3)
USD/CAD: Retail dealer knowledge reveals 62.50% of merchants are net-long with the ratio of merchants lengthy to brief at 1.67 to 1. The variety of merchants net-long is 12.17% decrease than yesterday and 54.91% greater from final week, whereas the variety of merchants net-short is 1.94% decrease than yesterday and 27.51% 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.
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 provides us an additional combined USD/CAD buying and selling bias.
— Written by Christopher Vecchio, CFA, Senior Strategist