Canadian Dollar Technical Forecast: Bearish
- It was a big week for USD/CAD with the pair jumping to a fresh two-year-high.
- CAD/JPY remains of interest. The fundamental backdrop points to bullishness in the pair with higher rates in Canada and continued low rates in Japan. But – there may be some changes on the horizon with Japanese policy regarding the Yen and that could make for an interesting backdrop. And GBP/CAD just plummeted to a fresh 37-year-low, which could make for interest around bullish-CAD scenarios.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
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It was a big week for the US Dollar and USD/CAD just put in a massive move as the pair jumped to a fresh two-year-high. From many vantage points, the move looks parabolic and that’s a difficult type of thing to work with on a technical basis.
The benefit of technical analysis, at least in my opinion, is structure. Structure that can allow for risk management and the implementation of if-then statements that can make my objective simpler. But, for that technical analysis to work there needs to be nearby structure or else, the technical analyst is flying blind.
This can show up after a big move. There’s little nearby support to work, and what has shown is so short-term that it’s difficult to put much stock into it. But, from a trend perspective – there is little to argue with as last week was a clear show from the bulls and this was a potent combination of both US Dollar strength and Canadian Dollar weakness, which was helped along by a continued fall in oil prices.
That breakout from last week nullified the bear flag formation as price jumped up to fresh two-year-highs with a massively breakout on the weekly.
USD/CAD Weekly Price Chart
On the four-hour chart below, I’ve picked out a few spots of possible higher-low support potential. The 1.3500 psychological level is a major level and this remains of interest, particularly for aggressively-bullish approaches. A bit-lower is another spot of interest around the 1.3350 area, after which a prior spot of resistance at the 1.3200 area comes into play.
USD/CAD Four-Hour Price Chart
Chart prepared by James Stanley; USDCAD on Tradingview
CAD/JPY has been a higher-flyer for much of 2022 as a more-hawkish Bank of Canada offset a familiarly-dovish Bank of Japan, allowing for a smooth topside trend fed from fundamentals and witnessed on the techs.
The big question is for how long can the Bank of Japan hold the line with their extreme-dovish monetary policy, particularly as much of the rest of the world is lifting rates? It’ll be hard to remain an outlier for much longer in my opinion. I looked into this ahead of the BoJ rate decision on Wednesday, highlighting the 31-year high in inflation that had already shown in Japan. And the bank kept policy on hold at their rate decision, but the Ministry of Finance announced an intervention later that day.
Interventions don’t usually work long-term. This one seems especially imprudent, as Japan is using FX reserves to, in essence, place a counter-trend FX trade. This seems to be a fruitless use of capital and points to the fact that the BoJ might need to do something at some point in the near future. What, however, remains to be seen.
In CAD/JPY, this week brought a trendline break, and this opens the door to the prospect of continued reversal next week.
CAD/JPY Daily Chart
GBP/CAD fell to fresh 37-year lows last week, trading at levels not seen since 1985. The 1.5000 psychological level was sliced through in Friday trade as the British Pound plummeted against most major currencies. It’s also now very near the all-time-low of 1.4559.
This can keep the door open for pullback themes into that 1.5000 level, after which the door could possibly re-open to bearish continuation scenarios in the pair. The key here would be a show of near-term resistance at that 1.5000 spot and, if that doesn’t happen, the retracement may run for a bit longer as this pair is in a massively-oversold state.
GBP/CAD Monthly Chart
— Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX Education
Contact and follow James on Twitter: @JStanleyFX