USD/CAD Weekly Forecast: Waiting for a new scenario
|- USD/CAD rebounds from early March pre-virus start and technical support lines.
- General US dollar rise on Thursday brought USD/CAD two figures higher.
- Federal Reserve economic pessimism did not affect US currency.
The USD/CAD completed the repudiation of the pandemic panic this week dropping to its early March take off point and rebounding sharply in the overall dollar surge on Thursday, retaining that advantage to the Friday close.
From October 2018 until the viral lift-off in March the USD/CAD traded in a wide 1.3000-1.3600 range with a more restricted upper limit of 1.3400 in place from mid-June last year until three months ago. The question for traders is has the pandemic established a pro-US dollar bias that will now play out as the American and Canadian economies recover from their imposed paralysis?
Evidence so far is inconclusive. The sharp rebound in the USD/CAD on Thursday was a natural response to the rapid six-figure fall in the last three weeks (May 25 close 1.3983-June 10 close 1.3411). It is notable that the rebound at 1.3400 (approximately) was not only the jump-off for the panic but also the upper limit from last June until March as mentioned above.
The Federal Reserve’s extension of its ultra-low interest rate policy through the end of 2022 via its Projection Materials forecasts on Wednesday and Chairman Powell’s uncertain verging on pessimistic remarks on the economy in his press conference, did not damage the US currency and the equity collapse on Thursday was a profit-taking piece with currencies.
In the judgement of the markets Mr. Powell speaks for all traditionally organized prognostications in this highly original economic situation. The view from the Bank of Canada is essentially the same. Neither can be sure of the course of the recovery.
Mr. Powell commented that the May non-farm payrolls was “the biggest economic shock in the US and the world in living memory.” Canada’s employment change for May, which added 289,600 jobs instead of the predicted loss of 500,000 showed the same disconnect between economic and policy forecasts and the real economy as in the United States.
The recovery in the US, Canada and elsewhere depends on the desires of millions of consumers and business owners to reconstitute their lives. Government assistance can facilitate the return to normality but it cannot provide the energy, effort and persistence required. The recovery is in the hands of the people.
West Texas Intermediate failed to penetrate the $40 barrier and fell towards $35 on Thursday closing at $36.26 on the dollar translation effect and profit taking on the 107% gain from the $19.04 open on May 1 to $39.60 finish on June 10..
USD/CAD outlook
The rebound from 1.3400 satisfied USD/CAD technical and fundamental criteria. As we noted last week the space below 1.3400 was heavily traded between June 2018 and March 2020. It is replete with support lines. The market’s cursory attempt to penetrate this zone and the rapid reversal shows that an effort to take the USD/CAD lower will require technical preparation or a shift in the fundamental outlooks for the US and Canadian economies.
Although the pandemic had abated and the countries that have reopened their economies show no signs of second wave of infections and fatalities, that view will need to be confirmed in the days ahead before the currencies will abandon the risk-aversion range established from early March. In the absence of a replacement scenario the substantial technical difficultly below 1.3400 will present a formidable barrier to a lower USD/CAD.
Until either the US or Canadian economy offers a compelling case for a faster recovery the recent ranges will beckon. Historically the US has the more flexible and responsive economy and would be expected to resume growth faster, but with the political turmoil in American cities that may not be a case this election year.
Canadian statistics June 8-June 12
A very thin week in Canada
Monday
Housing starts at 193,500 y/y in May were considerably better than the 150,000 forecast and April’s 166,500 result and were the best since March.
Friday
Capacity utilization in the first quarter at 79.8% was below the prediction, 80% and the fourth quarter’s revised 81.4% rate.
US statistics June 8-June 12
Wednesday
Consumer prices were a bit weaker in May than expected but recovered from April’s 0.8% decline. CPI fell 0.1% on the month vs a flat estimate. For the year they rose 0.1% following April’s 0.3% increase. Core inflation dropped 0.1%, under the 0.05% prediction and higher than the April 0.4% decrease. On the year prices were up 1.2% after April's 1.4% gain.
The Federal Reserve left the base rate target range at 0.0%-0.25% as universally expected. The bank’s economic projections, the first since last December showed a 6.5% GDP decline this year and a 5% recovery next with the fed funds rate unchanged through the end of 2022.
Chairman Powell stressed the uncertainty over the speed and strength of the recovery and said that the Fed would do all it could to restore the economy to its levels before the pandemic. It was possible in his view that the Fed and Washington might need to do more in the months ahead.
Thursday
Initial jobless claims dropped to 1.542 million, less than the 1.5 million forecast and continuing claims fell to 20.929 million, more than the 20 million prediction.
Friday
The Michigan consumer sentiment survey for May was better than anticipated: 78.9 vs a 75 forecast and April's 72.3; current conditions 87.8 vs 85 and 82.3 in April; expectations 73.1 vs 70 and 65.9 in April.
Canada and US statistics summary June 8-June 12
The wide differential between April and May/June economic data suggests that in both countries the earlier month was the bottom of the pandemic reaction and that economists are underestimating the strength of the reaction.
In Canada housing starts confirmed the May recovery thesis coming in 30% above forecast and just 7.5% below the September to February average.
It will be interesting to see if Canada’s ADP employment change report for May on Thursday, unlike the US released after the government report, will confirm the unexpected rise in payrolls. It is forecast to drop 280,300. The official payroll report for May was projected to decline 500,000, it rose 289,600
For the US initial and continuing claims, now at the end of May, improved though slightly less than anticipated. Consumer sentiment for June in the preliminary Michigan reading came in at 78.9 ahead of the 75 estimate and May’s 72.3 score, though it is a long way from the February and March scores of 101 and 89.1.
Canada statistics June 15-June 19
US statistics June 15-June 19
USD/CAD technical outlook
The Thursday dollar increase and Friday consolidation brought the relative strength index from its first oversold position since early January nearly back to neutral. It was the sharpest gain since that gain in the second week of the year.
The 21-day moving average at 1.3708 supports the first resistance line at 1.3720 and is backed up by the 100-day average at 1.3760. The 200-day average at 1.3469 is mid-way between two support lines and unlikely to be of much import should the USD/CAD move lower.
Resistance: 1.3720; 1.3800; 1.3860; 1.3920; 1.4000; 1.4080
Support: 1.3560; 1.3500; 1.3420; 1.3360; 1.3315; 1.3275
USD/CAD sentiment poll
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