USD/CAD Forecast: Uncertainty near and far

• USD/CAD gave back most of last Monday’s technical break.
• Lack of fresh motive to take USD higher brought on minor profit taking.
• Data provides little fresh impetus for the currency pair.

The technical surge on Monday February 3^rd that brought the USD/CAD to 1.3300 for the first time in two months defined the range in the latter part of this week as neither US statistics or the China safety-trade were sufficient to improve on Monday’s spike to 1.3329. The nearly identical ranges on Thursday and Friday, 1.3240-71 and 1.3236-69, speak to the lack of direction and motivation.

There were no Canadian statistics after housing starts and building permits on Monday.

US data was thin and uneventful and Fed Chairman Jerome Powell’s two days of Congressional testimony produced no market moving quotes.

US and Canadian statistics, February 10-14

On Monday the National Federation of Independent Business whose optimism index polls its membership for their outlook rose slightly to 104.3 in January from 102.7 in December putting it near the middle of the tight 101.2 to 105.0 range for 2019.

Chairman Powell's Semiannual Monetary Policy Report appearance in the House on Tuesday and the Senate on Wednesday featured his upbeat assessment of the US economy.

“We find the US economy  in a very good place…wages [are] moving up most at the bottom  end of the wage scale…it’s great to see, ”he said on Tuesday.  “We have learned that unemployment can be lower than many had thought without increasing inflation.”

Under questioning by the Representatives he observed that the risk of recession is low.  “There is no reason why the expansion can’t continue. There is nothing about this expansion that is unstable or unsustainable.”

Trade concerns have diminished.  “The signing and implementation of the USMCA agreement will be a positive for the economy, in that it removes some uncertainty on trade.” The Chairman has in the past observed that the US-China trade pact has reduced tensions between the nations.

Several members mentioned the potential economic effect of the corona virus in China and Mr. Powell temporized.

“We will be watching this carefully.  What will be the effects on the US economy? …Will they be material?”  “We have to resist the temptation to speculate on this.” The impact on the US economy would have to be “persistent” for the Fed to contemplate a policy change. It is “very likely” that there will be some spillover on the US economy but China’s Asian neighbors and major trading partners in Europe have greater risks.

“We will be watching this carefully.  What will be the effects on the US economy? …Will they be material?”   He noted, “We have to resist the temptation to speculate on this.” The impact on the US economy would have to be “persistent” for the Fed to consider a policy change. It is “very likely” that there will be some spillover on the US economy but China’s Asian neighbors and major trading partners in Europe have greater risks.

The Chairman noted that that the global decline in rates has reduced the central bank’s ability to effect the economy.  “The current low interest rate environment also means that it would be important for fiscal policy to help support the economy if it weakens,” he said.

He also observed that the ban had learned from the recent turmoil in the overnight funding market that the size of its balance sheet needed to ensure smooth function was larger than it has though.  However, “The repo-market spike...doesn't appear to be a symptom of deeper financial problems,” he said.

Mr. Powell’s comments offered a number of interesting points on central bank policy and global economics but in main arena, the status of the US economy and potential Fed policy it had all been said before.

ON Thursday CPI was a bit stronger on the year in the headline at 2.5% in January from 2.3% in December and as expected in the core rate at 2.3%.   Initial jobless claims for the February 7^th week were 205,000 leaving the four-week moving a 212,000 near it 50 year low.

Retail sales for January on Friday were as forecast, 0.3% with the ex-autos category at 0.3% as well and the control group slipping to flat missing it 0.3% prediction.  December was weaker than initial posed with overall reading revised to 0.2% from 0.3%, ex-autos  to 0.6% from 0.7% and the control group  to 0.2% from 0.5%.

Canadian statistics were limited to housing starts for January on Monday which were slightly better than predicted at 213, 2000 and up from December’s 195,900. Building permits in December jumped 7.5%, much more than the 0.6% forecast and reversing the last three negative months.  

Statistics conclusion February 10-14

The trajectories of the US and Canadian economies were little changed by the week’s data. The slightly weaker US retail numbers, especially in December may shave 0.1% or less from fourth quarter GDP, but a much more pronounced and prolonged drop would be needed to affect perception and rate policy.  The Fed’s confidence is not misplaced.

The Bank of Canada had noted the decline in housing at the last meeting, this modest recovery will ease some of the economic slowdown fears at the bank.

Canadian statistics February 17-21

Core prices in January are expected to rise 0.4% after Decembers 0.4% drop when reported on Tuesday.  The annual rate should rise 0.1% to 1.8%. Headline change will be 0.1% following flat in December and yearly should be stable at 2.2%.

Thursday’s ADP employment change report is forecast to add 71,800 jobs in January following December’s 46,200.  If correct this would be considerably stronger than government’s national figures for January and December at 34,500 and -2,800.

Retail sales for December on Friday will tell if the slowing job creation in the second half of the year had any effect on consumption and have the greatest potential for market impact.  In November sales rose 0.9% and the ex-autos number was 0.2%.

US statistics February 17-21

Monday is a holiday in the US markets are closed.

Housing starts and building permits for January on Wednesday are expected to be within recent parameters for a healthy housing sector. Permits are to rise to 1.45 million annualized from 1.42 million in December while starts should return to trend at to 1.39 million in January from 1.608 million the prior month which was the highest total since the housing bubble.

The FOMC minutes for the January 28-29 meeting at 2:00 pm on Wednesday will provide detail for the Fed’s current neutral stance and positive view of the US economy but will not offer any new insights to policy.

Thursday’s initial jobless claims is of historical  and econometric interest as the US labor market continues its record setting run but unless it is wildly out of kilter, markets will pass notice.

Market Economics of London issues its PMI reports for February, manufacturing, services and composite on Friday serve as a second to the better known and far older ISM report. The manufacturing index has consistently read higher than the ISM never dropping into contraction with a below 50 reading with a low of 50.3 last August.  In January manufacturing PMI was 51.8, services 53.4 and composite 53.3.

Statistics summary February 17-21

Canadian inflation numbers are of some interest. If they come in lower than forecast this will hint at further slowing in the economy. Likewise for the retails sales figures on Friday. As the Bank of Canada has warned of waning growth any confirmation will weigh on the Canadian dollar.

The recent divergence between the ADP and national employment numbers are curious but not for market direction as they are both pointing higher.

American statistics are will not have major market impact. Housing has ceased to be a market concern, the FOMC minutes will not separate from public policy and Markit’s PMI figures are an appetizer not the main course.

USD/CAD technical outlook

The limited one figures range this week, 1.3235-1.3330 with the downside contained by February 3rd technical run kept the analytical picture intact. 

The 21-day moving average is decidedly positive but the lower close on Friday from the week's open though over 200 points above the early January low was not enough to turn the 100=day average higher or reverse the trend in the 200. 

Resistance begins with a band from 1.3330-1.3345 representing the highs last week and December and on the upside Last October.  Next and stronger  is at 1.3400 which served as both a top and bottom on many days from March through June. The area between 1.3400 and 1.3500 was traded almost continually from late April to  early June and will absorb most technical penetration without setting a specific line. Above that is a strong line at 1.3500 and a weak one at 1.3550.

With the drop below 1.3300 support has become more pertinent than it was last week. The first  is at 1.3240 this week's triple low. After that we have 1.3200,1.3150  and 1.3100  as last week which were established prior to December and are moderate to strong.  The weak lines are 1.3025 and  1.2955 are from the December's liquidity-free plunge and are unlikely to give more than token effort.  

USD/CAD sentiment poll

Once again near  term sentiment has reversed reflecting the week's trading while longer term views are unchanged.

The one week outlook has a weaker bullish view, 47% vs 54%,  a stronger bullish note 47% vs 31% and a neutral loss 6% against 15%.  The forecast at 1.3253 vs 1.3313 reflects market reality.

The one month view is more bullish, 33% vs 22%, slightly more bearish 63% vs 61% and barely neutral 4% vs 17%. The forecast is little different at 1.3218 vs 1.3233. 

The one quarter view is  similar for the bulls 14% vs 11%, weaker for the bears 53% vs 72% and almost double for the uncertain 33%% vs 17%. The forecast is status quo 1.3144 vs 1.3134.

Canadian and US statistics gave little indication of changing economic direction this week and do not seem likely to provide much different next.  The loner term bearish cast to the USD/CAD  is independent of the major market variable in China and does not reflect its potential.