Commodity Currency Performance: CAD and AUD Poised for Gains Amid USD Weakness
In recent weeks, the currency market has witnessed a notable shift as commodity currencies—particularly the Canadian dollar (CAD) and Australian dollar (AUD)—have begun to gain traction against the US dollar (USD). This movement is being driven by a mild risk-on sentiment and changing market dynamics, raising expectations about potential future price developments.
USD/CAD: A Decline from Historic Highs
Less than two weeks ago, the USD/CAD currency pair surged to a 22-year peak, propelled by a wave of concerning headlines surrounding tariffs and trade. However, this height was short-lived, with a subsequent decline of approximately 4.3%, suggesting a significant momentum shift. Analysts are predicting that further downside for USD/CAD is on the horizon as the month progresses.
While February is set to conclude in the next nine trading days, current indicators suggest the formation of a bearish engulfing candle on the daily charts, signaling a failed attempt to break through the critical 147 mark. Historical resistance points established in January 2016 and March 2020 highlight the struggle of the USD to maintain strength in the 146-147 range.
Sentiment Shifts in Market Positioning
Despite previous speculative bets against the Canadian dollar, data from recent Commitment of Traders (COT) reports indicate a notable shift in sentiment among large speculators. Following a peak in net-short positioning in CAD futures last August, there has been a bullish divergence, suggesting a change in market dynamics.
Moreover, asset managers have begun reducing their gross-short positions while gradually increasing long positions in CAD, further illustrating a potential sentiment reversal. As a result, expectations are growing that the CAD may regain strength against its US counterpart, especially as traders anticipate a re-testing of this year’s low for USD/CAD.
Technical Outlook for USD/CAD
Looking forward, the core projection for USD/CAD is a potential slide down to the 1.40 mark, sitting comfortably above the October high. However, analysts caution against expecting a linear descent. The recent weeks have already shown two consecutive weeks of selling, with last week’s trading range indicating a reduction in bearish momentum.
Chart patterns further bolster this outlook, with prices remaining above a critical volume point of control (VPOC) and the 100-day exponential moving average (EMA). Additionally, the emergence of a bullish hammer and an inside-day doji on the daily chart suggest a hesitance to move sharply lower, hinting at a possible short-term rebound.
Key Resistance Levels and Upcoming Inflations Reports
For traders holding bearish positions, notable resistance levels to watch include the 38.2% Fibonacci retracement level at 1.4296 and the weekly close high from 2020 around the 1.43 mark. These thresholds could pose challenges for sellers attempting to push USD/CAD lower.
Investment sentiment may also be affected by the impending Canadian inflation report. Presently, the Bank of Canada (BOC) observes inflation metrics within the upper half of its 1-3% target band. However, movements towards the lower end closer to 2% could diminish expectations for further monetary easing, thereby supporting CAD in its tussle against the USD.
Despite these metrics, ongoing uncertainties surrounding tariffs—often a dominant factor influencing commodity currencies—could continue to sway market conditions. Should tariffs be eliminated or delays extended, the USD may weaken further against commodity-focused currencies such as CAD, NZD, and AUD.
As traders navigate this evolving landscape, the interplay of economic indicators, market sentiment, and technical signals will be pivotal in shaping currency valuations in the weeks to come.
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This analysis is provided by Matt Simpson, a market expert who tracks currency trends and economic developments. Follow Matt for more insights on Twitter @cLeverEdge.
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