USD/CAD Forecast: The future is most uncertain

• US dollar surge brings it to a nine month high against the Canadian.
• Loonie weakens on 15% crude oil price decline.
• Markets assess impact of potential global slowdown.

The Canadian dollar lost 1.5% on the week against its US counterpart as sharply weaker American Treasury rates were countered by a 15% fall in the price of West Texas Intermediate crude oil and political and environmental protests in Canada which blockaded ports, highways and railways across the nation.  

Losses for the Canadian dollar were substantial every day except Tuesday, 0.5% on Monday, Thursday and Friday and 0.17% on Wednesday.  

Overall the US dollar had a mixed week  from concerns over the effects of the Coronavirus on the global economy, splitting the difference in the majors, falling against three, the euro, the yen and the Swiss franc, but rising versus the aussie, the kiwi, the sterling and the Canada.

Canadian and US statistics February 24-28

In Canada it was a low information week.

Wholesales sales for December on Monday, old news at this point, came in at 0.9% more than double the 0.5% expectation and in line with the upper range of this volatile series over the past year.

Friday’s fourth quarter GDP of 0.3% was as forecast but the previous three months were downgraded to 1.1% from 1.3%.

American statistics had a strong week though overshadowed by the Coronavirus reaction and the plunging US Treasury rates.

Consumer confidence from the Conference Board for February on Tuesday was 130.7 below the 132.0 forecast and January's 131.6 reading, near the mid-point of the last two years but among the highest scores of the past two decades. 

New home sales in January, 0.764 million on an annualized basis for January, was better than the 0.71 million forecast and December’s 0.694 million result. It was the highest rate of purchases since September 2007 and is evidence of a thriving housing sector supported by the performance of the labor market.

Durable goods orders for January on Thursday were much better than expected in all four categories. The ex-defense purchases at 3.6% were almost three time the 1.3% prediction and the business investment proxy, non-defense capital goods at 1.1% was far ahead of the 0.1% projection and the highest since last October.  Business investment has averaged 0.45% a month since the China trade deal was announced in October 2019. It had been -0.05% for the prior six months.  In addition, the December results for all categories were revised higher.  Finally, fourth quarter GDP was confirmed at 2.1% in the second release with one more assessment due on March 26^th.

Initial jobless claims registered 209,750 in its four-week moving average once again knocking on the door of its half-century low.

Friday’s core personal consumption expenditure price index for January fell to 1.6% from 1.7%, and while this might interest the Fed, low inflation is a consumer asset.  Personal income rose 0.6% last month double the estimate and far outstripping December's 0.1% gain. It was the highest monthly gain since December 2012.  Personal spending was 0.1% lower than forecast at 0.2% but December’s figure was revised 0.1% higher to 0.4% balancing the effect.

The final version of the University of Michigan’s Consumer Sentiment Index for February improved to 101.0 from 100.9 bringing it to the highest level since March 2018 and the second highest point since the 2009 recession.

Statistics conclusion

The good to excellent US economic information for January was sufficient on its own to promote the greenback. Business spending improved in spite of lackluster expectations and consumer outlook remained robust. The pace of new home sales especially was indicative of economic well-being at the lower and younger end of the spectrum as these are generally less-expensive first purchases.

Combining the US results with the impact of lower energy prices on Canada’s resource dominated economy and the apparent inability of the Trudeau government to handle the protests that have disrupted the country’s rail network the rise of the USD/CAD was a natural result.

Canada statistics March 2-6

Two events will dominate the Canadian scene this week.  One Wednesday the Bank of Canada will be the second major central bank to face the possibilities of the global slowdown from the Coronavirus. The Reserve Bank of Australis meets on Tuesday.

 The BOC has been steadfast in maintaining its base rate at 1.75%, now the highest among the major central banks.  It may  be too early to expect a cautionary rate cut and expectations are for stability. 

The question for the governors will be, in the face of the weakness in the Canadian economy which the bank acknowledged at its last meeting, is the potential economic damage from the Coronavirus serious and certain enough for action? This is a dilemma every central bank will be assessing over the next several weeks.

On Friday the Canadian employment report for February is out. The unemployment rate is forecast to rise to 5.6% from 5.5% and the economy’s is expected to add just 10,000 jobs after January’s 34,500.  Wages rose 4.43% on the year in January.

US statistics March 2-6

A busy week in the United States.

Monday brings the February manufacturing purchasing mangers’ index (PMI) from the Institute for Supply Management.  It is expected to maintain its hold on expansion at 50.5, down from January’s surprise jump to 50.9 from 47.8 in December. It was the first month above the 50 demarcation between expansion and contraction since August. New orders are forecast to fall back to 49.8 from 52 in January with the employment index stable at 46.6. This the first major manufacturing indicator that may register the impact of the China health crisis and will be closely watched.

The Democratic presidential primaries on Tuesday will occupy most of the news flow but with an inconclusive result for the nomination anticipated, they are unlikely to have much market impact.

Wednesday is the ADP precursor to the Employment Situation Report for February on Friday.  Private payrolls are forecast to have added 191,000 workers in February following the January bonanza of 291,000.

Services PMI for February is projected to be unchanged at 55.5. New orders are forecast to rise 0.1 to 56.3 while employment should gain 54.1 from 53.1.  As with the manufacturing figures traders will be looking for any signs of weakness related to the China virus slowdown.

The Organization of Petroleum Exporting Countries (OPEC) begins its meeting on Thursday and while their sway over oil prices is very weak the recent sharp drop in crude is sure to bring rhetorical flourishes from the members.

The US employment report on for February Friday is forecast to bring 178,000 new jobs after January’s unexpectedly strong 225,000. Unemployment will be unchanged at 3.6%, near its five decade low and annual wages will rise 3.2% up from 3.1% in January.

Statistics conclusion

Economic statistics in both nations this week will be viewed through the single narrow lens of the Coronavirus and its impact on global growth.  The US dollar has already established its ascendancy over the Canadian in the comparison of relative damage, expect that judgement to continue.

USD/CAD technical outlook

The rise in the USD/CAD this week took out all the resistance lines up to 1.3500. After penetrating to 1.3465 the pair retreated to 1.3410 just below a prominent line from May and early June last year.

 The 21-day moving average steepened its climb while the 100-day average has yet to turn conclusively higher and the 200-day average reflects the August to December decline. 

The first resistance at 1.3475 is moderately strong, the site of a series of tops from late April to early June 2019.  Next is a weak line at 1.3500, the highs of a few sessions in the same April to June period. Next is 1.3535, the close and open for three days at the end of May and beginning of June. Above that are two weak lines from December 2018 at 1.3600 and 1.3645.

Below there is strong support at 1.3340, 1.3300, 1.3260 and 1.3225 all related to the November through February ranges. Beneath that are the lines at 1.3185, 1.3135, 1.3080, 1.3040 and 1.2960. 

USD/CAD sentiment poll

Near term predictions have unsurprisingly soared but the farther out we go the stronger become the bearish expectations.

The one week view is less bullish 50% to 62%, but then the bulls wishes have been fulfilled. The bearish view is diminished 25% to 38% and the uncertain opinion has rise to 25% from flat. The forecast of 1.3443 is just above the current market. 

The one month view is less bullish 25% vs 48%, more bearish 68% vs 52% and 7 percent neutral up from flat.  The forecast is 1.3312 is up from last week's 1.3199 but below Friday's close. 

The one quarter view is nearly equal in bullish sentiment  22% vs 25%, much higher in the bearish view 72% vs 44% and decidedly less unsure 6% vs 31%. The forecast at 1.3227 is up from last week's 1.3159  and nearly even with this week's open at 1.3225. 

The rapid, emotional and one direction movement this week has clearly left traders unconvinced that it is permanent.  Though parts of the rational, the strong US economic statistics and the slipping Canadian economy, are real, the potential for deterioration  in the months ahead is high and the sharply lower US Treasury rates will remain as long as the Coronavirus drags on.  Despite this week's rise in the USD/CAD the future is most uncertain.