USD/CAD Forecast: The Canadian dollar is more vulnerable to bad data
|- Friday's gain largely a technical break of the April 21 trend line and minor hourly resistance at 1.4040.
- Overall Dollar Canada has consolidated between 1.4000 and 1.4200.
- Oil price rise from Tuesday on did not help the Canadian.
- Canadian unemployment to reach historical levels in April.
A modest recovery in oil prices after a plunge early in the week failed to boost the Canadian dollar which remains vulnerable to the triple threat of an extremely weak energy market, poor domestic economic data and the global risk trade preference for its US counterpart.
West Texas Intermediate had returned to nearly $20 by the close on Friday but could not break above that level which, prior to mid-April, had marked an 18 year bottom in the commodity. For the Canadian economy the prospect of low energy prices for a prolonged period of weak demand while the global economy recovers from the pandemic is a daunting one for its domestic employment and export earnings.
Canadian gross domestic product was flat in February down from 0.2% in January. The industrial product price index which tracks major commodity prices fell 0.9% in March and thoughit was just over half the -1.7% forecast it was the third negative month in a row. The raw materials price index which measures price paid by Canadian manufacturers was down 15.6% in March also its third straight decline. Markit’s manufacturing PMI for April came in at 33, far below the 41.6 score in March.
In the gradual retreat of the risk aversion trade last week the US dollar lost to all the majors (euro, sterling, yen, aussie and loonie) but the shift versus the Canadian was minimal opening the week at 1.4103 and closing at 1.4089.
The run higher on Thursday and Friday higher was the product of two technical breaks. First was the move through the down trend line on the hourly charts that extended back to April 21. This brought the USD/CAD to resistance at 1.4040 where it lingered until just before the London close.
The last hour of the London market (11:00 am-noon NY time Friday) is a well know moment for the week’s unfinished business. Trading breached the line at the beginning of the hour, continued to the day’s high at 1.4109 and then faded toward the close at 1.4089.
USD/CAD outlook
Job numbers on both side of the border are center stage on Friday.
The US Employment Situation Report and the Canadian unemployment rate and employment change figures are expected to reach hitherto unimagined levels of destruction. The Canadian economy is forecast to have lost 2.75 million jobs in April with an unemployment rate of 16%. The range of estimates in the Reuters survey is from -1.5 million to -5.5 million. In the US the losses are forecast to be 21 million with a range from 5 million to 30 million and an unemployment rate of 16%.
Employment desecration of this size will not be a matter of comparative advantage between the two economies but a measure of the global economic catastrophe and a likely occasion for risk aversion move to the US dollar.
Risining tension between the United States and China over the origin of the coronavirus may spill over into the implementation of the trade deal further retarding commodity demand.
The US dollar still possesses all the cards in the pair comparison. Crude oil prices will remain low as long as demand is weak, Canada’s statistics reflect an economy and employment as damaged as the US but with a much smaller internal market for its manufactured products and much lower global demand for its exports and finally in the still expanding economic crisis there is no alternative to the US currency for safety. The bias in the USD/CAD is higher.
Canadian statistics May 4-May 8
Tuesday
Exports are forecast to fall to C$47.7 billion from C$48.34 in February. Imports were C$49.32 billion in February. The trade balance is expected to expand to C$2.5 billion in March from –C$-0.98 billion in February as Canadian resource exports diminish.
Thursday
The Ivey purchasing managers’ index for April is due. The March score was 26.
Friday
The Canadian unemployment rate is forecast to jump to 16% from 7.8% in March as job losses will more than double from 1.01 million in March to 2.75 million in April. Average hourly wages rose 6.12% in March and the participation rate was 63.5%.
Housing starts are predicted to more than halve to 80,000 annualized in April from 195,200 in March. Building permits fell 7.3% in March.
Canadian statistics conclusion
As the full extent of the labor market inferno becomes apparent on Friday the benefit, if one can use the term, will accrue to the US dollar. In the competition between the loonie and the greenback equivalent statistical disasters feed the US dollar's risk premium.
If the Canadian employment numbers are notably better than those of the US, it could aid the loonie. No one, however, expects that.
US statistics April 27-May 8
USD/CAD technical outlook
The USD/CAD gain on Thursday and Friday brought the relative strength index from neutral on Wednesday to mildly positive on Friday. The trailing nature of the 100-day and 200-day moving averages mean they have yet to catch the explosion of the pair in early March and, despite their upward tilt, are not a reliable indicator of market purchase intent which in this case depends on the evolution of the pandemic. The 21-day average was crossed in Friday's move higher and thus loses its negative connotation.
Resistance: 1.4165; 1.4210; 1.4365; 1.4465
Support: 1.4040; 1.3950; 1.3883; 1.3785
USD/CAD sentiment poll
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