USD/CAD Forecast: Risk remains the key ingredient for the currency market
|- US dollar retains risk edge amid viral uncertainty.
- Bank of Canada economic view lacked clarity undermining loonie.
- Crude oil at lowest level in two decades, as OPEC-Russia accord fails to lift prices.
The Dollar Canada reached its best level in a month on Tuesday at 1.3863 before falling oil prices and equivocal pandemic news sent the market hurrying back to its default risk position of buying the US currency.
West Texas Intermediate (WTI, CL.1) closed at $19.87 on Wednesday in New York, the first finish below $20 since October 2001 in the aftermath of the September terrorist attacks. Prices continued sharply lower on Friday touching $17.41 before recovering to just over $18. The OPEC-Russian production deal which is backed by the United States has failed to stem the rout as consumption has fallen 10% and more and is expected remain at recessionary level for the immediate future pushing the accumulation of supply to the limits of storage capacity.
Bank of Canada Governor Stephen Poloz is hardly alone in confronting an economic maelstrom with policy tools that seem inadequate to the task but sometimes white lies have their purpose. His comment that it is impossible to judge when the economy will recover did not help market sentiment. A bit of guarded optimism or even simply hope might have helped.
The bank left the overnight rate at 0.25% after three reductions in March had brought it to the “effective lower bound.” The bank announced an increase in the amount of Treasury bills it will buy and new provincial and corporate bond purchases.
Signs that the pandemic in Europe might be easing which had bolstered the loonie last week were partially dashed as Germany and the UK lengthened their restrictive policies even as the the Germans said they preparing to reopen parts of their economy.
Canadian statistics were limited to manufacturing sales for February which at 0.5% were much better than the -0.1% expectation. Automatic Data Processing’s (ADP) March employment change report saw its Canadian clients reduce payrolls by 177,300 and the revision to February from 7,200 to 116,700 served as a reminder of how far the economy has fallen.
USD/CAD outlook
Currency markets are willing to move beyond the risk-aversion scenario of the past month and its perennial tilt toward the US dollar but traders require the cooperation of events. The trauma of the last six weeks and the uncertainty of an economic future that is defined by success in controlling the pandemic means that any negative news on the virus sends the markets fleeing to the US dollar.
The sensitivity of the USD/CAD to the price of oil is part of the same risk quotient since it is the collapse in demand prompted by the defensive shutdown of a good portion of the global economy that is driving crude lower.
Until the economic analysis can move beyond the current state of reaction to pandemic developments and there is progress in reopening the US and European economies the Canadian dollar will continue to be just the other side of the risk trade.
The USD/CAD is supported at 1.3950, 1.3875 and 1.3780 with resistance lines at 1.4110, 1.4200 and 1.4360 from price action over the past month. Though the volatility has been high since the global onset of the virus in early March, price action has begun to establish levels of interest and the longer the USD/CAD remains in these ranges the greater the chance that transitory developments will be contained there.
Tuesday
Retail sales for February are expected to decrease 0.1% as in January. The ex-auto figures is projected to be flat after January’s 0.4% gain.
Wednesday
CPI is forecast to be little changed in March with the overall index at 0.4% as in February and 2.1% from 2.2%. Core CPI is predicted to fall to 0.3% from 0.7% and to be unchanged at 1.8% annually. Disinflation from the collapse in demand will become a serious concern in the month ahead if the Canadian and US economies are not reopened soon but March is probably too soon for evidence.
Canadian statistics conclusion
The ADP payroll report was an afterthought following the loss of 1 million jobs in the March Statistics Canada accounting on the 9th. BOC Governor Poloz was less than optimistic but real damage to the loonie outlook comes from the oil sector where both extant supply and production far outstrip current demand. February retail sales are but an asterisk and March CPI is relevant if it reveals disinflation.
US statistics April 13-17
Wednesday
Retail sales in March were down 8.7% on the month below the 8% forecast but a good portion of that was lost automobile purchases as most dealerships in the country were closed. Sales ex-autos were off 4.5% slightly better than the -4.8% prediction. Industrial production fell 5.4% in March in its largest monthly decline on record. Capacity utilization plunged to 72.7% from 77% as many auto plants and other factories are closed. The New York Fed Empire State Manufacturing Survey crashed to-78.2 in March, its lowest ever, from -21.5 in February and though New York is no longer a major manufacturing center the reading is another tell for the American economy.
Thursday
Jobless claims remained the centerpiece in chronicling the economic cost of the government ordered pandemic shutdowns. Initial claims rose 5.245 million in the week of April 10 bringing the four week total to 22.03 million more than eight times the next highest total of 2.637 million in March 2009.
US statistics April 20-24
Tuesday
Existing home sales are about 90% of the US market. The forecast for March of an annualized rate of 5.4 million down from 5.77 million in February is probably too optimistic in light of the layoffs and shutdown in the second half of the month.
Thursday
Initial jobless claims have declined 24% in two weeks from 6.867 million (3/27) to 5.245 million (4/10), markets will be watching (and hoping) that this is the start of a trend. Preliminary April purchasing managers’ indexes from IHS Markit are forecast to remain in contraction, dropping to 42.8 in manufacturing from 48.5 and climbing to 42 from 39.8 in services. The Kansas City Fed Manufacturing Activity Index fort April will be released at 10:00 am EDT, March was -18.
Friday
Durable goods orders for March are expected to drop 11.2% after February’s 1.2% gain. Non-defense capital goods orders, the proxy for business spending, is projected to decrease 0.4% following February’s revised 0.9% drop.
The preliminary Michigan consumer sentiment for April is forecast to decrease to 67.2 from 71.
US statistics conclusion
Retail sales confirmed the the huge damage to consumption from the business shutdowns though almost half was due to automobiles. Initial claims moderated but the interest will be if the figures for the April 17 week confirm the downward trend on Thursday. Markit PMI numbers are normally a preliminary for the ISM surveys coming in the first part of May but in the current environment may gain trader attention on their own. Durable goods for March have been superseded by retail sales but the business investment proxy will provide some new information.
Markets have moved from initial shock of the unemployment claims numbers in the US to a more detailed enumeration of the economic collapse without changing the dire view into the second quarter. Confirmation of that outlook will tend to support the risk trade to the US dollar though with so much bad news already priced in, the opportunities for reversal are growing.
USD/CAD technical outlook
The relative strength index lost its Wednesday bump but retained a positive aspect above 50. The two longer moving averages have kept their upward tilt, and as the large gains in the USD/CAD are but a month-and-a -half old that bias will remain for several weeks.The 21-day average reflects the retreat from the risk aversion highs of the third week of March.
Resistance:1.4110: 1.4200: 1.4360; 1.4500; 1.4675
Support: 1.3950: 1.3875: 1.3780: 1.3565: 1.3540: 1.3460
USD/CAD sentiment poll
The return of risk-aversion is clear in this week's polling. The one week view has flipped to bullish at 46% vs 36%, with a neutral one month, 33% vs 27% vs 40% and a mildly bullish one quarter outlook, 47% vs 42%. An unusual aspect to this week is that all of the forecasts are on the same big figure and the spread between the three is just 26 points. This is a profoundly uncertain market.
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