CAD : Strong Oil Prices
(Fri, 11 Feb 2021). Canada’s notable drop in coronavirus infections , in tandem with resilient oil prices, may open the door for the local currency to gain ground against its haven-associated counterparts in the coming weeks. The 7-day moving average tracking Covid-19 cases has fallen by over 50%, since peaking on January 8 at 8,885.
Indeed, these positive health developments seem to have bolstered local sentiment, with Canada’s Economic Mood Index hovering at pre-pandemic highs.
This may open the door for the Bank of Canada to tighten its monetary policy settings sooner-than-expected, given Governor Tiff Macklem’s comments that “as much as bold policy response is needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road”.
Moreover, crude oil’s recent surge to its highest levels in over a year will likely support the commodity-sensitive Canadian Dollar. Backwardation of the oil futures curve hints at strong near-term demand, with the spread between the March 2021 and March 2022 contracts widening substantially. Additional output cuts from Saudi Arabia may also prop up prices.
Therefore, it appears that the current fundamental backdrop could favour the cyclically-sensitive Loonie, and pave the way for further gains against the Japanese Yen and US Dollar.
CAD/JPY DAILY CHART – 2014 TREND BREAK HINTS AT GAINS
From a technical perspective, CAD/JPY appears poised to extend its recent surge to post-crisis highs, after penetrating the downtrend extending from the 2014 highs and surging away from the trend-defining 55-day exponential moving average (81.36).
With the RSI pushing back above 60, and the MACD tracking firmly above its neutral midpoint, the path of least resistance seems higher.
A daily close above the 61.8% Fibonacci (82.61) would probably signal the resumption of the primary uptrend and propel price to challenge psychological resistance at 84.00. Alternatively, sliding back below range support at 82.05 – 82.15 could trigger a pullback to the psychologically pivotal 81.00 mark.
USD/CAD DAILY CHART – EYEING A RETEST OF YEARLY LOWS
USD/CAD rates seem to be eyeing a push to retest the yearly low, after failing to break above the 55-EMA (1.2813). With both the MACD and RSI diving back below their respective neutral midpoints, further losses appear likely in the near term.
Breaching the February 11 low (1.2668) would likely trigger a downside push to challenge the yearly low (1.2589), with a daily close below needed to signal the resumption of the primary downtrend. Alternatively, a push back above 1.2700 could open the door for buyers to drive the exchange rate back towards range resistance at 1.2755 – 1.2770.
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