USD/CAD forecast: Trade optimism and higher oil to underpin basis for downside correction

• USD/CAD bears take back control on trade deal optimism and higher oil prices. 
• Bank of Canada and Federal Reserve sentiment remains key.
• Oil prices extend upside correction to 21-DMA.
• Forex poll offers a bearish bias for USD/CAD over near to longer-term forecasts.

USD/CAD's recovery in October through the 200-day moving average was short-lived - By the end of the week, funds gave up all of October's advances and fell to the lowest level since 11th September's business. A fundamental shift in risk appetite, if sustained, could be the catalyst to see a meaningful retreatment of the summer bull trend with the 1.30 handle on the cards. 

This was the week: 

Oil prices recovered out from the $51 handle and pierced the 21-day moving average as risk appetite returned late in the week. However, the Middle East and tanker wars will remain a roadblock to the market's psyche and while there has been some good ground covered between the US and China following the week's trade talks, there are still mountains to be climbed going forward.

There were key data events throughout the week for the pair, but trade talks were taking the spotlight. It was a coin of two sides which made for volatility in markets leading into Friday's critical meeting between Trump and China's Vice Premier and trade leader, Liu. However, it appears that there was positive progress made in the negotiations and a phase 1 deal has been agreed in principle, which will bring some relief to tensions. "We are very close to ending trade war," Trump said, announcing some details of the phase 1 deal on Friday. 

Key CAD events:

Unemployment continued to fall in Canada. The data published by Statistics Canada on Friday showed that the unemployment rate fell to 5.5% in September from 5.7% in August and came in better than the market expectation of 5.7%. The total number of employed increased 53,700 and surpassed analysts' estimate of 10,000 by a wide margin.

For the week ahead, on the 16th of Oct, headline inflation will take the focus. "We look for headline inflation to edge higher to 2.0% in September with prices down 0.3% m/m. Energy and food prices will exert a drag on the headline index, while a correction in airfares will weigh on the ex. food & energy component. However, the BoC's preferred measures should hold at 2.0% on average, which will allow the BoC to remain patient on the sidelines in October," analysts at TD Securities explained. 

Key U.S. events:

Headline Consumer Price Index was a disappointment but failed to really rip into the Dollar as the focus remained on conflicting trade talk headlines in the build-up to Friday's showdown between Trump and China's Vice Premier and trade leader, Liu. Nonetheless, there was some downside in the buck and the data likely have little effect on the Fed's calculus for the near-ter, with the markets pricing in a rate cut at the end of this month - Headline inflation for September came in at 0.0% month on month (0.023% unrounded), keeping the annual rate unchanged at 1.7% year on year.

Next week brings US Retail Sales and Industrial Production - Another firm 0.4% increase in Retail Sales for September and for the key control group should be a reminder to markets that the US consumer fundamentals remain sound although the optimism there could be off-set by a slowdown in industrial production - "We expect IP to slow from its solid 0.6% m/m jump in August to 0.2% in September, largely reflecting fading manufacturing output and despite an expected rebound in growth for the utilities sector. We project a flat print for manufacturing, as less supportive global demand and continued trade uncertainty continues to drag production lower," analysts at TD Securities argued. 

USD/CAD Technical Analysis

USD/CAD dropped back to the 50% Fibonacci mean reversion of the July rally to September highs and en-route to the 61.8% retracement target around the 1.3150s which guard prospects for the July lows that guard a run to 1.30 the figure. On the upside, bulls are going to be set on the Friday's session highs that meets the 200-day moving average at 1.3286.

USD/CAD daily chart

USD/CAD Forecast Poll

The Forex Forecast Poll is a sentiment tool that highlights near and medium-term price expectations from leading market experts which shows a neutral bias for USD/CAD.