Canadian Dollar Forecast: USD/CAD, CAD/JPY Risk of Reversal Rising

CAD, USD/CAD, CAD/JPY Analysis and Talking Points

  • USD/CAD | Watch Macklem for Possible Currency Comments
  • CAD/JPY Beginning to Look Stretched on the Topside

USDCAD: Since the BoC’s hawkish taper, CAD strength has been dominant with USD/CAD dropping over 4.8% and hitting a six year low. However, with the move looking somewhat overcooked, yesterday’s bounce from 1.2061 might be the first sign of a possible reversal. I must note that I have been in favour of CAD strength, given my Q2 trade idea. But with that said, the risk to reward for further CAD strength in several crosses (vs USD and JPY) looks unappealing with a lot of good news seemingly priced into the currency. The Canadian Dollar has been surprisingly resilient in the face of deteriorating risk sentiment, although, with commodities beginning to rollover (Iron ore down 10% overnight), CAD’s resilience is unlikely to last. Going forward, the main risk event for the CAD will be the upcoming speech from BoC Governor Macklem at 1600BST where the focal point for CAD traders will be on any comments regarding the strength of the Loonie. As the CAD on a trade weighted basis (TWI) is at a six year peak, there is a risk that the Governor jawbones the currency, which could shake out some weak CAD longs.

Canadian Dollar Forecast: USD/CAD, CAD/JPY Risk of Reversal Rising

Source: Refinitiv

USD/CAD Overshoots Relative to Oil Prices

Canadian Dollar Forecast: USD/CAD, CAD/JPY Risk of Reversal Rising

Source: Refinitiv

On the technical front, near term resistance for the pair is situated at 1.2185 (23.6% Fib), should USD/CAD close above, this raises the likelihood that a short-term countertrend rally is on the cards. Alongside this, momentum indicators remain in oversold territory, which remains a concern for recent CAD bulls.

USD/CAD Chart: Daily Time Frame

Canadian Dollar Forecast: USD/CAD, CAD/JPY Risk of Reversal Rising

Source: Refinitiv

CAD/JPYis another cross that is looking technically stretched on the topside with the cross trading near 10% above its 200DMA and thus is at risk of a correction. While rising US yields and resilient oil prices has pushed CAD/JPY to multi-year highs a move back below 90.00 may be a cause for reassessment of the view that the cross can extend higher.

Canadian Dollar Forecast: USD/CAD, CAD/JPY Risk of Reversal Rising

Taking a look at the technicals, the RSI continues to highlight a bearish divergence, therefore by not confirming the recent highs, this supports the view of a potential reversal in the cross. That said, corrective risks are likely negated with a break above 91.50-60.

CAD/JPY Chart: Daily Time Frame

Canadian Dollar Forecast: USD/CAD, CAD/JPY Risk of Reversal Rising

Source: Refinitiv

CAD/JPY Chart: Daily Time Frame

Canadian Dollar Forecast: USD/CAD, CAD/JPY Risk of Reversal Rising

Source: Refinitiv

A Helpful Guide to Support and Resistance Trading

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