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Canadian Dollar Rally to Continue after a Strong Week, But Medium Term Strength Uncertain

Canadian Dollar ended last week as the strongest ones on a couple of factors. With some near term resistance taken out, such rally will likely continue for the near term. Swiss Franc ended as the second strongest. While Dollar was pressured for most of the week, it staged a notable rebound on Friday to close the week mixed only.

On the other hand, rise in global treasury yields sent Yen broadly lower to end as the worst performing. However, late selloff in Euro and Sterling argues that Yen might stabilize in the new week and turn into consolidation. But Yen’s outlook would stay generally bearish.

Canadian Dollar strengthen to continue in near term, but questionable in medium term

Canadian Dollar’s rally finally took off last week on the back on a couple of inter-related factors. Recent rise in commodity prices, from copper to lumber to oil kept the economic recovery robust. As the world, except a few countries like India, are moving more towards a pandemic exit phase, demand for commodities and price pressure would remain strong. BoC’s economic outlook improved on the developments, which gave them the room to taper asset purchases at last meeting. There are speculations that BoC would continue tapering in faster than expected pace. The more optimistic picture also lifted Canadian bond yields, which in turn gave another boost to the Loonie.

Though, while there is more upside potential for Canadian Dollar, we’d argue that the sustainability for the rally in medium term is in question. Firstly, other central banks would eventually follow the steps to scale back the pace of their stimulus. Secondly, as the initial snap back phase is past, price pressures and demand on commodities will fall back into more normal levels.

Technically, Canadian Dollar will also be facing some important medium to long term resistance levels as it extends further rises.

USD/CAD took out 1.2363 low decisively last week and resumed whole down trend from 1.4667. From near term point of view, deeper fall would be seen to 100% projection of 1.2880 to 1.2363 from 1.2653 at 1.2136 next. But such decline could be seen as the third leg of the pattern from 1.4689 (2016 high). Hence, strong support could be seen at around 1.2061 (2017 low) to bring rebound. This level coincides with 50% retracement of 0.9406 (2011 low) to 1.4689 at 1.2048.

CAD/JPY also resumed the up trend from 73.80 by breaking through 88.28 resistance firmly. Next near term target will be 61.8% projection of 77.91 to 88.28 from 85.40 at 91.80. Such rise is seen as the third leg of the pattern from 74.80 for the moment. Hence, we’d pay attention to topping signal around 91.62 (2017 high) and 91.80, at least on first attempt.

AUD/CAD also broke through 0.9488 support to resume the decline from 0.9991. Such fall is seen as a correction to the up trend from 0.8058, and it’s now in the third leg. Deeper fall would be seen to 100% projection of 0.9991 to 0.9488 from 0.9757 at 0.9254. Nevertheless, strong support could be seen there, which coincides with 0.9247 support, as well as 38.2% retracement of 0.8058 to 0.9991 at 0.9253, to bring rebound.

Canadian Dollar also looks ready to resume up trend against European majors too. EUR/CAD’s rebound from 1.4723 should have completed at 1.5191 already. Fall from 1.5978 is likely ready to resume. Break of 1.4723 low will pave the way to 61.8% projection of 1.5783 to 1.4273 from 1.5191 at 1.4536. EUR/CAD could then be close to the trend line support of the long term triangle pattern that started at 1.6103 (2016 high). Hence, strong support could be seen just slightly be 1.436 to bring rebound.

GBP/CAD dived through 1.7176 support tor resume the decline from 1.7884 last week. From a near term angle, next target of 100% projection of 1.7884 to 1.7176 from 1.7584 at 1.6876 should be easily taken out. We’re viewing such fall as the third leg of the pattern from 1.8047 (2020 high). Hence, strong support could be seen only at around 161.8% projection at 1.6438, and 100% projection of 1.8047 to 1.6532 from 1.7884 at 1.6369 to contain downside. GBP/CAD has relatively more downside potential in the medium term.

Dollar index rebound strongly after dipping to 90.42

Dollar index was under pressure for most of the week and dropped to as low as 90.42 but rebounded strongly from there. At this point, we’d still expect deeper decline as long as 55 day EMA (now at 91.49) holds. Fall from 93.43 should target a test on 89.20 low next. However, sustained break of 55 day EMA will argue that such decline has completed. In this case, consolidation pattern from 89.20 could be extending with a third leg back to 93.43 resistance, maybe further to 38.2% retracement of 102.99 to 89.20 at 94.46) before completion.

EUR/JPY’s up trend resumed last week and surged to as high as 132.35. As a temporary top was formed there with subsequent retreat. Initial bias is neutral this week for some consolidations first. Downside of retreat should be contained well above 129.57 support to bring rise resumption. On the up side, break of 132.35 will target 100% projection of 114.42 to 127.07 from 121.63 at 134.28.

In the bigger picture, rise from 114.42 is seen as a medium term rising leg inside a long term sideway pattern. Further rise is expected as long as 127.07 resistance turned support holds. Next target is 137.49 (2018 high). Decisive break there will open up the possibility that it’s indeed resuming the up trend from 94.11 (2012 low).

In the long term picture, EUR/JPY is staying in long term sideway pattern, established since 2000. Another rising leg in progress for 137.49 resistance and above.

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