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Canadian Dollar Forecast: USD/CAD Surge Facing Hurdles

USD/CAD, EUR/GBP Analysis and Talking Points

  • Topside Resistance for USD/CAD
  • Equity Market Sentiment to Dictate CAD Price Action

As equity markets extend losses, high beta currencies such as the Loonie remains on the backfoot. Additionally, the combination of a firmer USD has pushed USD/CAD towards levels not seen since the backend of 2020. That said, judging by US/CA rate differentials and oil prices, this suggests that the pair is slightly above fair value.

At the same time, the 1.30 handle will be a stumbling block for USD/CAD on its first test. However, unless equity markets stabilise, the path of least resistance is higher USD/CAD, which as shown below has been the biggest factor behind the recent CAD weakness.

Canadian Dollar Forecast: USD/CAD Surge Facing Hurdles

USD/CAD vs US/CA 5Y Differentials and Brent Crude Oil

Canadian Dollar Forecast: USD/CAD Surge Facing Hurdles

Source: Refinitiv

Canadian Dollar Forecast: USD/CAD Surge Facing Hurdles

Source: Refinitiv

Hurdles Ahead for USD/CAD

On the technical side, while the 2021 high at 1.2963 is in focus, the key target for USD/CAD bulls will be the 1.3000 handle. This area I would expect to be a tough area to hold above, particularly on its first attempt and with the 200WMA within close proximity at 1.3040. As such, should we see a slight reprieve in equity markets, this would be a ideal area to fade recent gains.

A Helpful Guide to Support and Resistance Trading

Keep in mind, with the S&P 500 falling some 5% since Thursday, there is a good chance of a turnaround Tuesday, which could be the catalyst for a pullback in USD/CAD and as has been the case recently, market participants have attempted to front run this in the Monday afternoon session.

USD/CAD Chart: Daily Time Frame

Canadian Dollar Forecast: USD/CAD Surge Facing Hurdles

Source: Refinitiv

IG Client Sentiment Shifts Signal USD/CAD May Reverse Lower Soon

Data shows 49.81% of traders are net-long with the ratio of traders short to long at 1.01 to 1. The number of traders net-long is 12.92% higher than yesterday and 22.94% higher from last week, while the number of traders net-short is 3.11% lower than yesterday and 4.11% 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.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse lower despite the fact traders remain net-short.

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