CANADA DOLLAR FORECAST:
- The Canadian dollar has weakened sharply against the US dollar in recent weeks, despite strong oil prices at a multi -year high
- While fundamentals favor the strength of the Canadian dollar, sentiment will continue to determine the near -term direction of the high beta currency
- Market conditions could start to improve soon when China withdraws curfews and other restricted mobility measures
Most Read: Latest British Pound – Is GBP/USD Testing 1.2000?
Oil became one of Canada’s top exports after 2008. As a result, the country has seen its trading conditions improve and its currency rise during periods of rising commodity prices. Now, however, there’s something wrong. Over the past few months, as crude oil soared to a multi -year high, the Canadian dollar has weakened in contrast to the U.S. dollar, with USD/CAD rising more than 4% from April lows.
The recent price action raises two important questions: what is driving the performance against the US dollar, and will the trend continue? Examining possible catalysts, it cannot simply be monetary policy differences or yield differences, as the Bank of Canada has moved almost one step further with the Fed, aggressively leading interest rate hikes to control inflation. Second, that AS the strength of the dollar also cannot be driven solely by the unusual attitude of the US, as the Canadian economy is in a better position, with analysts predicting its gross domestic product to grow by 4.5% this year and 3% in 2023, nearly double that expected for America. state.
If not fundamentally, what encourages USD/CAD? Market sentiment is highly likely the perpetrator. Recent risk aversion tones and extreme levels of volatility are caused by stagflation concerns has generated strong bids for safe haven assets, causing traders to throw away high beta currencies. The following chart, which overlaps the S&P 500 and USD/CAD futures (reverse scale for better visualization), seems to support the sentiment argument. In it, we see almost a perfect negative correlation between the two assets since the beginning of the war in Ukrainewith each stock sale coinciding with a spike in USD/CAD.
USD/CAD (REVERSE) VS S&P 500 FUTURE
Given that negative sentiment has been a major downside catalyst for the Canadian dollar, it is reasonable to argue that the trend could reverse quickly as conditions improve and global equities stop the bleeding, allowing the currency to align with its strong fundamentals. With China suggesting that the government can start dismantling Shanghai locking in the coming daysa state of extreme pessimism can begin to subside, paving the way for stable risky assets. That said, the “loonie” is is in a good position to dominate the strength against the US dollar should the mood change from fear to cheerfulness. This means that that is big take back in USD/CAD may be almost there.
In terms of technical analysis, after being pushed by the Fibonacci resistance at 1.3025, USD/CAD has fallen towards the key support in the area of 1.2900. If the decline manages to break this level at the bottom, selling activity could accelerate, paving the way for a movement towards 1.2725. On further weakness, the focus shifted to 2022 lows, reaching from 1.2460 to 1.2400. Conversely, if the buying momentum continues, initial resistance appears at 1.3025. If this ceiling is broken, the bulls could launch an attack at 1.3180.
USD/CAD TECHNICAL CHART
USD/CAD charts are provided using TradingView
EDUCATIONAL TOOLS FOR TRADERS
- Are you just starting out? Download starter guide for FX traders
- Do you want to know more about your trading personality? Take it DailyFX Quiz and find out
- IG customer position data provides valuable information on market sentiment. Get your free guide on how to use this powerful trading indicator here.
— Written by Diego Colman, Market Strategy Specialist for DailyFX