USD/CAD price forecast: is a Canadian dollar reversal brewing?

The Canadian dollar has crumbled so far this year, but could spot USD/CAD price action be gearing up for a big reversal lower?

USD/CAD price forecast: Canadian dollar chart hints at potential trend reversal

Spot USD/CAD climbed an impressive 2% year-to-date, but the Canadian dollar has begun to recover from recent downside amid fading coronavirus fears

The Canadian dollar could continue rebounding and drive USD/CAD price action toward chart support after another hard rejection at a major zone of technical resistance

Retail forex trader positioning on USD/CAD is at extremes and is experiencing a dramatic shift according to a recent IG Client Sentiment Report

The loonie has moved broadly lower over the last month and a half with USD/CAD surging about 260-pips since the December 31 close.

Downward pressure exerted on the Canadian dollar relative to the greenback can be largely attributed to an influx of risk-aversion and volatility resulting from the novel coronavirus outbreak in Wuhan, China.

Market participants have grown weary over the economic cost of the coronavirus, which spurred widespread demand for safe-haven currencies (typically bullish USD) and a sharp selloff in oil (typically bearish CAD).

This, along with other fundamental factors, have helped steer USD/CAD 2.6% higher to start the year. More recently, receding concern over the coronavirus has facilitated a recovery in broader market sentiment and retracement lower in USD/CAD.

From a technical perspective, the 1.3300 handle has presented a major technical barrier which provided support for the Canadian Dollar relative to its US counterpart just this past September, October and December.

That said, preliminary signs that this zone of technical resistance for spot USD/CAD may bolster the Loonie once more seem to be appearing, which has potential to threaten the currency pair’s positively-sloped trendline if selling pressure picks up.

Aside from a hard rejection at the 1.3300 price level, technical indicators like the Moving Average Convergence Divergence (MACD) and Bollinger Band suggest that further downside in spot USD/CAD could be in the cards.

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Yet, a broader reversal higher by the Canadian Dollar might be premature with spot USD/CAD clinging onto technical support provided by its 23.6% Fibonacci retracement level of its year-to-date trading range.

If this area can be breached, however, USD/CAD bears may make another push lower to test the 34-day exponential moving average near the 1.3200 mark.

On another note, retail trader positioning on USD/CAD is awfully bearish according to a recent IG Client Sentiment Report.

The insight details a mere 18.06% of traders are net-long resulting in a short-to-long ratio of -4.54 to one. Yet, the data also reveals that USD/CAD traders are less net-short yesterday and compared with last week, which warns that spot prices may soon reverse lower.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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