- A rise in oil prices has dragged the CAD higher
- Analysts regard USD/CAD as overvalued
- Price can go as low as $1.20 this year
USD/CAD had been continuously moving lower in the last 4 years. While the series of lower highs is still intact, the price action has also moved below other technical indicators. If oil prices move higher in 2020, we may witness a bigger retreat in USD/CAD.
Fundamental analysis: Global outlook improving
Oil prices have undoubtedly contributed to the strengthening of the Canadial dollar across the board. For comparison, the CAD, popularly referred to as “Loonie”, appreciated around 11% against the greenback since January 2016 when this pair created a 13-year high.
During the same month, the crude oil prices printed a 13-year low. Similarly to USD/CAD, the oil prices have moved upwards in a continuous manner since 2016.
“An improved global economic outlook, alongside higher oil prices, has contributed to a stronger Loonie,” analysts from Danske Bank wrote in a note.
Of course, the Loonie is also a commodity currency, hence it is extremely vulnerable to global sentiments. The decrease in Mideast tension in the previous week may also help the currency to gain against the safe haven assets, such as the Japanese Yen or the USD. The optimism over the phase one of the U.S. – China trade deal should also boost commodity currencies.
“Fundamentally, we still regard USD/CAD as overvalued, with fair-value estimates in the low 1.20s,” it is further said in the Danske Bank note.
Technical analysis: Risk is to the downside
Since September 2017, USD/CAD traded within a triangle, which was ultimately broken last month when the price action penetrated the triangle support. Moreover, the bears also managed to break the mini wedge, as well as two other technical indicators.
All these layers of support are located in the $1.3050 – $1.3150 area, which represents a key zone for this pair. The next support zone is located in the low $1.29s.
If the bears maintain their control in the short-term, we could see a trip to $1.26s in the coming weeks and months. Looking at a mid-term picture, the price action may test the multi-year low, set in 2017, of $1.2060.
Danske analysts, on the other hand, are looking at a moderate retreat.
“We forecast USD/CAD at 1.32 in 1M, but keep the rest of our forecast profile unchanged at 1.32 in 3M, 1.29 in 6M and 1.27 in 12M”.
On the upside, the bulls would have to get above the key zone and trade comfortably above the $1.32 level for any substantial move higher.
The CAD had been moving higher in the past couple of years, mainly thanks to the increase in oil prices. If this trend with oil continues, as well as the expected improvement in the global risk appetite, USD/CAD looks well-positioned to for a bigger move lower.