Canadian Dollar Outlook:
- The Bank of Canada made a hawkish shift with its June rate decision, which sets up the Canadian Dollar on more favorable ground in the near-term.
- USD/CAD rates may be providing a ‘sell the rally’ opportunity, while CAD/JPY rates may soon breakout of their recent bull flag.
- According to the IG Client Sentiment Index, USD/CAD rates have a bearish bias in the near-term.
BOC Ups the Ante
The Bank of Canada surprised no one today when they raised their main rate by 50-bps to 150-bps overall. The market cared more about the BOC’s forward guidance – what the scope and scale of future rate hikes would be over the next few months. To that end, they didn’t disappoint.
A key phrase was included in the June BOC policy statement that was notably absent from the prior missive released after the April BOC meeting. While both of the BOC policy statements said “the pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation,” the June iteration also included the phrase “the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”
It would thus appear that a more hawkish BOC has arrived. While price action in USD/CAD rates may not reflect as much immediately – thanks to the competing spat of US economic data released at 14 GMT – it’s clear from shifts in Canadian government bond yields and ensuing price action in CAD/JPY rates that today’s BOC rate decision was a net-positive for the Canadian Dollar.
CAD/JPY Rate Technical Analysis: Daily Chart (June 2021 to June 2022) (Chart 1)
CAD/JPY rates have jumped over the past week, riding risk appetite higher in two forms: higher energy prices and the rebound in global equity markets. The prevailing price action since the start of April appears to be a sideways consolidation, which in context of the preceding move, suggests that a bull flag has formed on the daily timeframe. Measured at approximately 500-pips, CAD/JPY rates could be on the verge of a leg higher towards 108.00 in the coming weeks.
CAD/JPY rates are seeing bullish momentum gather pace. The pair is above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD continues to rise above its signal line, while daily Slow Stochastics are back in overbought territory for the first time since late-April. A close below 103.05 this week would indicate a greater likelihood of the bullish breakout beginning.
USD/CAD Rate Technical Analysis: Daily Chart (June 2021 to June 2022) (Chart 2)
USD/CAD rates remain below ascending triangle support formed over the past year, after the false bullish breakout above triangle resistance at the beginning of May. If the ascending triangle is no longer the prevailing pattern, an upward sloping parallel channel has been carved out since late-October 2021. Either way, the near-term path of least resistance appears to be lower. Provided an opportunity to ‘sell the rally’ against the daily 21-EMA (one-month moving average), USD/CAD rates may ultimately be on course for a return below 1.2500 in the coming weeks.
IG Client Sentiment Index: USD/CAD Rate Forecast (June 1, 2022) (Chart 3)
USD/CAD: Retail trader data shows 62.94% of traders are net-long with the ratio of traders long to short at 1.70 to 1. The number of traders net-long is 4.51% higher than yesterday and 56.62% higher from last week, while the number of traders net-short is 1.66% lower than yesterday and 6.58% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist