The Canadian dollar has continued to weaken since late September (it’s down ~5.6% against the USD in that time, fig 1). That’s been driven by the divergence between US and Canadian rates. At the front end, US 1-year yields have risen by around 36bps since late September, while Canadian 1-year yields have fallen by about 25bps (see fig 1a). That is, concerns about US inflation have re-accelerated, while Canadian macro data has disappointed.
With that, from a technical (price action) perspective, the CAD is once again approaching key support level at around 0.70. This level provided a floor during the pandemic in 2020, in early 2016, and in the mid-90s & 80s (see fig 1). It’s therefore a key level that traders are watching closely, particularly if policy and/or macro data start to tilt in Canada’s favour.
The Canadian dollar set up, from a models’ perspective, is also encouraging for the bulls. The medium-term technical scoring system for the CAD, for example, has moved to strong BUY, while short-term models are close to BUY (see figs 1b & 1c). At the same time, sentiment is bearish, and positioning is near record net SHORT levels (fig 1d). Historically, that combination of (i) oversold conditions; and (ii) pessimism (i.e. contrarian BUY signals) often signals a rally (on a tactical 1-3 month time frame).
The CAD is therefore at a critical juncture: Close to an important support level, over-extended to the downside (according to key/contrarian models), yet still challenged by the broader macro backdrop (for now). Upcoming central bank messaging, macro data, and any shifts in sentiment about global growth will be key in determining whether the currency can find a floor in coming weeks.
Fig 1: USD-CAD candlestick futures, shown with 200 day moving averages
Fig 1a: US & Canadian 1 year government bond yields
Fig 1b: CAD medium term ‘technical’ scoring system vs. USD-CAD
Fig 1c: CAD short term ‘technical’ scoring system vs. USD-CAD
Fig 1d: Net speculative positioning (no. of contracts) vs. CAD spot price (inverted)
