Canadian Dollar Forecast Overview:
- CAD/JPY has yet to breakout above multi-year resistance, while USD/CAD rates have floated higher following a bullish falling wedge.
- Vaccination rates in Canada have slowed so much that, if current trends hold, it will now take over 9.5 years to reach herd immunity – the worst rate among G10 currencies.
- According to the IG Client Sentiment Index, USD/CAD rates have a mixed bias.
O Canada, Neither Far Nor Wide
The Canadian Dollar has not enjoyed the same bullish momentum in the first few weeks of 2021 that it experienced in closing out 2020. On the surface, the two usual suspects don’t seem to be at fault: crude oil prices remain elevated (11% of Canadian GDP is tied to the energy sector); and the Bank of Canada hasn’t signaled a change in policy (rates markets point to under a 10% chance of a change in the main rate in 2021). The coronavirus pandemic response may be at fault for the Loonie’s struggles to continue along its bull run.
Indeed, Canada is struggling at inoculating its population. Total vaccinations per 100 people currently reside at a measly 2.6, well-below the rates in the UK (15.5 vaccinations/100 people) or the US (10.1). Canada’s vaccination rates are below those of Italy (3.7) and Germany (3.2), two countries that are struggling with outbreaks and as a result, seemingly endless lockdowns.
Cumulative COVID-19 Vaccination Doses Administered Per 100 People (December 19, 2020 to February 4, 2021) (Chart 1)
Vaccination rates in Canada have slowed so much that, if current trends hold, according to Bloomberg News, it will now take over 9.5 years to reach herd immunity – the worst rate among G10 currencies.
While this slow pace of vaccinations is not expected to continue, it does speak to the fact that the Canadian economy may be disadvantaged relative to some of its peers as other G10 economies regain their growth potential quicker. Until Canadian vaccination efforts spread far and wide, and total vaccinations per 100 people move closer towards their American counterpart, the Loonie’s wings may be clipped.
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CAD/JPY Rate Technical Analysis: Daily Chart (February 2020 to February 2021) (Chart 2)
We’ve been waiting patiently for resolution in the CAD/JPY triangle, and we may have to wait longer. Once again, CAD/JPY rates have tested parallel channel resistance in the 81.58/91 area, but have struggled to make headway, a common occurrence since June 2020. But the more times resistance (or support) is tested, the more likely it is to break as supply on the other side of the trade is exhausted. As trading is a function of both price and time, by simply maintaining their elevation, CAD/JPY rates are now above the descending trendline from the January 2018, October 2018, and February 2020 highs, and holding right at the 76.4% Fibonacci retracement of the 2020 high/low range at 82.16.
CAD/JPY rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is starting to rise again while above its signal line, while daily Slow Stochastics are trending higher into overbought territory. While more patience may still be required, CAD/JPY bulls may be on high alert for a bullish breakout attempt.
USD/CAD Rate Technical Analysis: Daily Chart (February 2020 to February 2021) (Chart 3)
In the prior Canadian Dollar forecast update, it was noted that “…the sharp bounce higher on Friday setup a potential morning star candle cluster, a bullish bottoming pattern. In context of price action since mid-December 2020, it appears that USD/CAD rates may be consolidating within the confines of a bullish falling wedge, which would call for a return to as high as 1.2957.” USD/CAD rates have run into downtrend from the March and October 2020 highs, which has served as resistance on four such attempts over the past two weeks.
Bullish momentum is taking shape, suggesting that USD/CAD rates may make another attempt higher yet. USD/CAD rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is just today in bullish sequential order. Daily MACD is rising but remains below its signal line, while daily Slow Stochastics are easing just below overbought territory.
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IG Client Sentiment Index: USD/CAD Rate Forecast (February 4, 2021) (Chart 43)
USD/CAD: Retail trader data shows 68.41% of traders are net-long with the ratio of traders long to short at 2.17 to 1. The number of traders net-long is 5.77% higher than yesterday and 34.69% higher from last week, while the number of traders net-short is 9.34% higher than yesterday and 21.03% 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.
Positioning is less net-long than yesterday but more net-long 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