CANADIAN DOLLAR PRICE FORECAST: USD/CAD, CAD/JPY VOLATILITY TO RISEThe Canadian Dollar fell sharply this week as market sentiment soured. The price volatility of USD/CAD and CAD/JPY is predicted to increase in the coming week. The Bank of Canada’s rate decision, the Bank of Japan’s monetary policy update, US inflation statistics, and OPEC+ all pose dangers. Last week, the Canadian Dollar was under selling pressure against key FX rivals such as the US Dollar and the Japanese Yen. On balance, the USD/CAD pair gained 118 pips, while the CAD/JPY pair lost 165 pips. The Canadian Dollar’s depreciation was mostly due to a broadening of risk appetite and a greater unwinding of the reflation trade. Crude oil prices concluded roughly -1.0 percent lower after falling as much as -5.5 percent in the middle of the week, putting pressure on the Loonie due to the Loonie’s traditionally strong direct link with oil prices. The Yen profited from the significant drop in global bond yields, which helped drive the CAD/JPY price action down. ONE-WEEK IMPLIED VOLATILITY SPIKES IN USD/CAD AND CAD/JPY AHEAD OF US INFLATION DATA, BOC & BOJ DECISIONS, AND OPEC+ RISK The Canadian Dollar’s volatility is expected to increase this week, according to the markets. This is most likely owing to the high-impact event risk that USD/CAD and CAD/JPY face, as detailed on the DailyFX Economic Calendar. In fact, the USD/CAD one-week implied volatility of 7.8% is in the top 84th percentile of measurements recorded over the last three years, while the AD/JPY one-week implied volatility of 8.2% is higher than the 20-day average reading of 6.9%. With the Bank of Canada ready to further taper its asset purchase program, the impending Bank of Canada rate announcement will be at the top of my radar. The Canadian Dollar may respond positively if QE is reduced by more than $1 billion from its current pace of $3 billion. On the other hand, the Bank of Canada’s decision to reduce its asset purchase program by less than $1 billion may disappoint both hawks and bulls of the Canadian dollar. Not to mention, the continued OPEC+ standoff is expected to keep crude oil prices rising, but news of a meeting or progress toward a settlement could prompt selling to resume. As a result, the Canadian Dollar may face headwinds. The release of US CPI data, which could strengthen USD/CAD price action, is another potential driver of the Canadian Dollar’s direction next week. Traders may try to fade recent US Dollar performance if headline US inflation readings are considerably higher-than-expected, and the Loonie is positioned as a good option to do so against. Similarly, keeping an eye on the Bank of Japan’s rate decision and rates, notably interest rate differentials between Canadian and Japanese government bonds, might help gauge CAD/JPY demand. DAILY TIME FRAME FOR THE USD/CAD PRICE CHART (25 DEC 2020 TO 09 JUL 2021) TradingView was used to construct this chart by @RichDvorakFX. Last week, the USD/CAD price action broke past descending trendline resistance, but the absence of follow-through lends it less credibility. The upper Bollinger Band is keeping a lid on advances, which correlates to this. As a result, the contracting Bollinger Band width indicates the possibility of consolidation. For USD/CAD bearish, negative divergence on both the MACD and the RSI is also a positive technical development. If USD/CAD weakness occurs next week, traders may go to the 20-day simple moving average and the mid-point retracement level of the most recent bullish leg for guidance. If selling pressure on the Canadian Dollar resumes next week, the major currency pair will likely struggle to overcome resistance at the 1.2650 price level. April’s swing high and the underbelly of the 200-day simple moving average show this technical stumbling block. A breakout to the upside might be triggered if resistance at the 1.2650-price level is invalidated. Fundamentally, if US inflation data exceeds expectations, the Bank of Canada delays tapering, and crude oil prices continue to face headwinds, that is a scenario worth contemplating. DAILY TIME FRAME FOR THE CAD/JPY PRICE CHART (25 DEC 2020 TO 09 JUL 2021) TradingView was used to construct this chart by @RichDvorakFX. To cap off a difficult week for Canadian Dollar bulls, the CAD/JPY price movement mounted a good comeback. The CAD/JPY pair was able to recapture its 100-day simple moving average as a result of this. Although the Loonie appears to have broken through rising trendline support, the recent bout of Canadian Dollar depreciation appears to be a little exaggerated. The relative strength index suggests this. On the MACD, there is also bullish divergence. Near the psychologically critical 90.000-price level, upward momentum could be stifled. Maintaining the 87.550-price level, though, would likely be critical in reducing the chances of a deeper pullback. If this support level is not held, the swing low from April might be exposed, which is at 85.650. — Rich Dvorak, a DailyFX.com analyst, wrote this article. For real-time market updates, follow @RichDvorakFX on Twitter./n
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