USD/CAD Forecast: Could drop to 1.1860 on strong Canada's manufacturing sales

Technically, USD/CAD continues to trade in a short term downtrend channel with most technical indicators and moving averages indicating a potential bearish channel breakout in the making. The pair opened the week at 1.2075 and spiked to highs above 1.21 barrier at 1.2146 on the same day. Subsequently, the pair then reversed directions, having faced rejection at 20-DMA located at 1.2155 levels. The pair extends declines, breaking below the 1.20 handle and reaching fresh four month lows at 1.1920 today.

USD/CAD trades below most major moving averages on the daily chart, with the daily RSI hovering around 33 in the oversold region suggesting more room for declines. Within this week, the pair may retest 1.19 handle and a break below the last opens floors for a test of channel trend line support at 1.1860 levels. On a bearish channel breakout, CAD bulls may take over driving the pair to 1.1800, the highest levels since January 16.

On the macroeconomic front, the US dollar is likely to extend its broad weakness led by recent series of weak US fundamental including the latest NFP report and retail sales numbers which disappointed markets.

Moreover, there are only US data on today's schedule that will shed more light on the path of the US economy. The Producer Price Index is due first, with a consensus of 0.1% month-on-month, followed by weekly initial jobless claims, which have been hovering around 15-year lows for the last two weeks. Thus, the US labour market remains the only part of the economy that might provide some consolation for policymakers.

On the CAD calendar, we have BOC Review today, which is not a major event and hence is unlikely to have much impact on the movement of USD/CAD. Also, BOC Deputy Governor Lynn Patterson will speak at an event in Vancouver. A speech that is more hawkish than expected is bullish for the Canadian dollar.

For Friday, we have the main highlight impacting the Canadian dollar - Manufacturing Sales. This ndicator has struggled, with four declines in the past five months. The February event remained at -1.7%, well off the estimate of +0.2%. The estimate for the March report stands at +0.3%, anticipating a rebound in the manufacturing sector volumes.

Next up tomorrow is Foreign Securities Purchases which is closely linked to currency demand, as foreigners must purchase Canadian dollars in order to buy Canadian securities. The indicator jumped in February, posting a gain of C$9.27 billion. This easily beat the forecast of C$6.00 billion. The upward move is expected to continue in the March release, with the estimate standing at C$7.23 billion.

Adding to this, US crude oil prices have more or less stabilized above $ 60 mark in the back drop of receding inventory levels. US oil stockpiles declined 2.191 million barrels in the week to May 8, posting the second straight weekly fall, compared to the expected drop of just 500,000 million barrels, the EIA said on Wednesday. The week before, inventories had declined by 3.882 million barrels. Also, sliding US dollar continues to limit the downside risks in oil prices, benefitting dollar-priced commodities. The US dollar index declined -0.43% to 93.33 on Thursday, hovering near fresh three month lows reached at 93.18.

To conclude: with all the above fundamental and technical factors at play, we expect USD/CAD to extend its bearish momentum tomorrow and could test 1.1860 levels and 1.1800 thereon on a stronger manufacturing sales data release. In case the data misses expectations and comes in weak, we could see a sharp rebound, driving USD/CAD higher for a retest of 1.20 and beyond.