US/CAD Forecast: Looking to move

• Weak October retail sales sends Canadian dollar lower.
• USD/CAD ends this week ends almost exactly where it began.
• CPI core and headline as forecast in November, ADP jobs weaker.

The Canadian dollar lost almost all of its weekly gains on Friday after retail sales for October came in far weaker than expected at -1.2% following September’s flat result. The forecast was for a 0.5% increase.  The three-month moving average for sales has now fallen from 0.8% in April to -0.367% in October. The 12-month has dropped from 0.092% in January and 0.308% in April to -0.042% in October. This is the first negative in the yearly average in seven years.

Reuters

The USD/CAD vaulted from 1.3144 to 1.3182 in the 15 minutes after the retail release on Friday and remained elevated into the close. 

The USD/CAD had opened the week at 1.3176 with the Canada improving to Wednesday closing at 1.3108 its best finish in three weeks and 1.3124 on Thursday.  The limited range of 1.3102 to 1.3186 this week is typical of the second half of the year. The overall range, high to low, since August 1^st has been 1.3042 to 1.3384 and the variation on the close has been 1.3055 to1.3336.

Canadian statistics were sparse this week but the representatives of the consumer and labor markets showed weakness.  

The consumer price index for November on Monday was as predicted with the headline up to 2.2% from 1.9% in October and the core rate stable at 1.9%.  After jumping from 1.5% in April to 2.1% in May and dropping back to 2.0% in June and July the core index has been stable at 1.9% since August.

Changes in private employment in November from Automatic Data Processing (ADP) on Wednesday continued the string of disappointing employment numbers coming in at 30,900 on a forecast for 66,6000. The prior two months have also missed their expectations by wide margins, October at 2,900 on a 53,000 prediction and September at 28,200 for a 56,500 estimate.

The weakness in ADP payrolls in November is of particular concern given the 71,200 loss in the government job figures for October, a result far below the 10,000 forecast. It is the second negative month in a row as September shed 1,800 positions.

Next week there is only one statistic from Ottawa. Monthly GDP for October on Monday with a 0.1% gain expected as in September.

American statistics were positive this week. Housing start and building permits for November were stronger than predicted continuing the string of improvements in home construction. Industrial production for November rose 1.1% better than the 0.9% forecast and a reversal of October’s 0.8% decline.  Economic activity in the third quarter was confirmed at a 2.1% annualized rate in the final revision from the Bureau of Economic Analysis.

In the US there are two notable figures in Christmas week. On Monday the 23^rd durable goods for November will be issued at 8:30 EST 13:30 GMT with a 1.9% increase expected in the main number following October’s revised 0.5% increase.  The non-defense capital goods ex-aircraft figure, an often cited proxy for business investment, will garner serious interest. It is forecast to be down 0.3% after unexpectedly rising 1.2% in October, far ahead of the -0.3% prediction.

Business investment has been the missing ingredient in US economic activity over the past year as executives have held off on spending awaiting the conclusion of the US-China trade talks. With the phase one deal scheduled for signing in January and having been anticipated since the middle of October, another gain would be an indication that the agreement may succeed in freeing blocked capital investment.

American statistics were on or ahead of expectations this week and the Canadian figures were weaker than anticipated especially in the important consumer and labor sectors. 

Another positive in the US  non-defense capital goods category would likely provide a boost to the US dollar in the shortened and liquidity impaired week ahead.

USD/CAD technical outlook

Once again the range of less than a figure this week has kept the USD/CAD technical levels stationary. The pair remains, despite a recovery on Friday, at the lower side of its six week range.

The 21, 100 and 200 day moving averages remain biased lower having peaked in early December in the 21, mid-December in 100 and early September in the  200.

The relative strength index has turned up from its oversold position at the end of last week but is still below the neutral line.

The down channel formed around the December 4^th breach of the former rising channel indicates room for the USD/CAD to move in either direction from Friday’s 1.3155 close. The upper limit is at 1.3210 and the lower is at 1.3085.

Major support and resistance levels for the USD/CAD are where they were at the end of last week.

Initial support is at 1.3050 with another line to 1.3018, the low in July this year.    There is another band at 1.2900-1.2880 the extent of lows late in late August and then again in late September 2018.

Below that are the lows in October 2018 at 1.2800 and 1.2760, the median bottom in May. Finally there is a support line at 1.2550 the low back to February 2018.

Above the current level there is resistance at 1.3350 the high for the last six months.  

A band from 1.3475 to 1.3500 marks a series of tops from late April to early June.  The limits were tripped several times at the beginning and end of the period  but Dollar Canada only closed above the upper limit at the start and finish. The final break on June 3^rd initiated a decline for the next six weeks.  

The next resistance is minor at 1.3525 just above the May high close. 

The December 2018 high at 1.3685 was the result of the extremely limited liquidity common at each year end. Likewise the brief high at 1.3800 in June 2017 and the spike to above 1.4600 in January 2016 are both too long ago and too brief to provide useful reference.

Technical support and resistance lines are indicators of historical price action. They provide notice of trading interest at the specified levels but offer little impediment to any fundamentally based move. 

USD/CAD sentiment poll

Near term sentiment has become more decisive, both more bullish (26% vs 9%) and more bearish (63% vs 58%). The difference subtracted from the sideways category (11% vs 33%).  This is another way of saying that a break of the recent ranges is expected soon, understandable perhaps with Brexit and the US China trade dispute reaching conclusions of a sort.  The average near term forecast is little varied 1.3137 vs 1.3142.

Medium term sentiment has become more bullish (60% vs 42%) with bearish sentiment unchanged at 35% and a drop in sideways (5% vs 23).  The average forecast is lower at 1.3183 vs 1.3211 last week. 

Quarterly sentiment is essentially unaltered, bullish (37% vs 36%) bearish (37% vs 35) and sideways (26% vs 25%).  The forecast is lower at 1.3133 against 1.3168.

The most interesting result this week is the conviction that the USD/CAD is primed for a move. Neutral sentiment is at 11% in the one week view and 5% in the monthly. Our experts are looking for a breakout. It is also of note that the initial move is forecast to be lower, in line with the most recent trend but that longer term the US dollar will gain strength.