Canadian Dollar Rate Forecast Key Takeaways:

  • The ONE Thing: Are the CAD bulls listening? The time may be right for further CAD strength to emerge. At May’s open, Governor Poloz came out withhawkishcomments thatseems slow tobe priced in as Governor Poloz noted that ‘interest rates are heading higher’ and ‘forces in the economy suggest not thetime to be at neutral.’ Hawkish indeed.
  • Canadian Dollar rate forecast favors further CAD strength on the break below support at the 55-day moving average at 1.2829 and the May 2 low at 1.2803 with resistance at the May 4 high of 1.2918.
  • Canadian Employment data on Friday could give the CAD bull’s something to add to their recent victories. Further support at 1.2723, 38.2% Fibonacci level.

Unlock our Q2forecast to learn what will drive trends for the US Dollar

Astrong Candian Dollar isemerging on the back of elevated crude oil prices and a weakening US Dollar on a soft CPI print for April. Now, thefocus will turn to the US/CA 2Yr yielddifferentials to see if the CAD can make up even more ground.

Thekey risk to further CAD strength appears to be overconfidence on a successful outcome to NAFTA talks and potentially rich pricing in of a May rate hike.

A Stretched 2-Year Yield Differential May Favor CAD Strength On Recent BoC Comments

Loonie Strength Emerges On Soft USD

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The chart above is one USD/CAD traders, or at least attendees of FX Closing Bell should be familiarwith. It shows the US-Canada 2-year yield gap, which has recently favored the US and as such USD/CAD bullishness.

What a trader should note is that we may be reaching the outer bands at a time when the marketis questioning how aggressive the Federal Reserve will be over the two-year horizon. The yield-gap (blue area) is pushing into 52-week extremes,and a retraction of the yield gap could further lift CAD.

May 10 Strong/Weak G8 FX Dashboard

Loonie Strength Emerges On Soft USD

Data source: Bloomberg

Thestrong/weak table above that I also share on FX closing bell helps to visualize where there is broad strength in the FX market. Currently, thestrongest currency is the Canadian dollar based on an equally weighted 5-day % change with the US Dollar as a close second. The weakestcurrency after the RBNZ and their new Governor Orr provided a message of patience is the New Zealand Dollar.

Key Levels In Focus on USD/CAD

Loonie Strength Emerges On Soft USD

Data source: Bloomberg

The dash-board above gives traders a range ofkey levels and insight on USD/CAD. 3-keyinsights are the Volatility band range, which takes an upper and lower 2-std.deviation rangeof the 20-DMA.

Second, the 30-day range is helpful for traders to grasp how much movement has occurred from high to low in the last 30-days.The third point, before painting out the levels is the relation ofspot to the 20-DMA. 100% means thatspot is equal to the 20-day moving average.

A negative number means the price currency or CAD isstrong relative to the 20-DMA and the US Dollar is weak relative to the 20-DMA. As such, the rate is trading below the USD/CAD 20-DMA at 1.2787.

The S1,S2, & S3 and R1,RS, & R3 help you see what levels are in focus based on recent and implied volatility. RS/S1 are the high and low of the current trading session while R2 & R3 are the 1- & 2-upper standard deviation level of the 1-week forward. S2 & S3 are the 1- & 2-lower standard deviation level of the 1-week forward. It may seem a bitquantitative, but the idea is to understand what levels should be watched based on recent volatility and expected volatility in the direction of the predominant trend.

Chart Focus on the Canadian Dollar – Was That a Bull Trap?

Loonie Strength Emerges On Soft USD

Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

USD/CAD traders may have just witnessed a bear trap. Inshort, what appeared to be a breakout of a multi-week range between 1.28-1.29 was quickly reversed with a move back below the May opening range low of 1.2803.

Price had appeared wedged between clean support at C$1.2803 and resistance at C$1.29 per USD. However, a swift move higher to C$1.2999 thatwas reversed provides swing traders with a strong resistance point to build a CAD long biasfrom. However, the US Dollar remains strong,so if CAD strength persists, GBP/CAD or EUR/CAD maybe better plays.

Bearish targets currently sit at C$1.2628 and C$1.2400 as Fibonacci Expansion targets.

Not familiar with Fibonacci analysis,check out this insightful article

Valuable Insight fromIG Client Positioning for USD/CAD:Retailselling activity drops, biased lower

Loonie Strength Emerges On Soft USD

Data source:IG Client Positioning

We typically take a contrarian viewto crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise.Yet traders are less net-short than yesterday and compared with last week.Recent changes in sentiment warn that the current USDCAD price trend may soon reverse lowerdespite the fact traders remain net-short (emphasis mine.)


Are you looking for longer-term analysis on the U.S. Dollar? OurDailyFX Forecasts for Q2 have a section for eachmajor currency, and we also offera excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via ourpopular and free IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a surplus ofhelpful tradingtools, indicatorsand resources to help traders. For those looking for trading ideas, ourIG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Ourtrading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and ourreal-time news feedhas intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, ourDailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re lookingat.

If you’re looking for educational information, ourNew to FX guide is there to help new(er) traders while ourTraits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---Written byTyler Yell, CMT

Tyler Yellis aChartered Market Technician.TylerprovidesTechnicalanalysisthat is powered by fundamental factorsonkey markets as well ast1radingeducational resources. Read more ofTyler’sTechnicalreportsvia his bio page.

Communicate withTylerand have your shout below by posting in the comments area. Feel free to include yourmarket viewsas well.

Discuss this market withTylerinthelive webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.

Talk marketson twitter@ForexYell


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