USD/CAD Forecast: A round trip and a two week low but still a three year high

• Stable WTI price may have helped improve loonie.
• USD/CAD drops to its closing level of two weeks ago.
• Bank of Canada cuts base rate 0.5% on Friday, begins asset purchases.

The two-week round trip in USD/CAD with the return leg this past week still leaves the pair at the highest level since February 2016. The break came on March 11 when the risk aversion riding US dollar cleared the May 2017 top of 1.3736 which was the interim peak

On the week the USD/CAD lost 2.7% opening at 1.4364 on Monday and finishing at the week’s but not the day’s low at 1.3983. Intra-day the pair touched 1.3922.

Friday’s emergency rate cut from the BOC and its plans to expand its balance sheet, to “provide support to the Canadian financial system and to the economy during the COVID-19 pandemic,” left the overnight interest rate at 0.25%, the same as the upper fed funds target. The bank said its large asset purchases would be government securities and commercial paper.

The bank did not pursue a quantitative easing policy during the financial crisis and its aftermath. Bank of Canada Governor Stephen Poloz said in the press conference that he wouldn’t argue with the idea that the new purchase programs constituted quantitative easing, but that bank’s goal is to be sure markets have sufficient liquidity to function normally not to lower interest rates.  There had been, he said, indications of strains in government securities and the commercial-paper market was effectively frozen. The bank plans to buy a minimum of $C5 billion a week until the recovery is underway. 

A rate cut before the bank’s next scheduled meeting on April 15 had been widely expected. This was the BOC’s third rate reduction since March 1 totaling 1.5%.  Mr. Poloz said it was unlikely the bank would venture into negative returns as it considers 0.25% as the lowest effective interest rate.

Stability in crude prices after falling 50% on the month to the Monday open may also have helped the Canadian dollar. West Texas Intermediate opened the week at $23.88 and finished at $23.26.

USD/CAD outlook

The prognosis for the Canadian dollar against the USD remains weak. Technically there is good support for the USD/CAD at 1.3950, 1.3800 and 1.3660 but more importantly the unresolved global health crisis does not play to the loonie’s strengths.   As numbers are put to the collapse in GDP around the world crude could sink further and, as been amply demonstrated, risk-aversion is a US dollar specialty.

Canadian statistics March 23-27

Monday

January wholesale sales rose 1.8% almost double the revised 1% gain in December and far in front of the -0.2% forecast.

Canadian statistics March 31-April 3

Tuesday

GDP from January is expected to rise 0.2% on the month following Decembers 0.3% increase.

Wednesday

Markit’s March PMI in manufacturing is forecast to rise to 53.2 from 51.8 in February.

FXStreet

Canada statistics conclusion

It’s a sparse two weeks for Canadian information. The Markit manufacturing PMI may linger above 50 in March but that will not change the conviction that worse and much worse is ahead for the Canadian economy.  The Bank of Canada rate cut and commencement of quantitative easing was the definitive assessment of the immediate future for Canada and its currency .

March economic information begining in earnest on April 6 sixth with housing starts for March and the Bank of Canada  Business Outlook Survey. On Tuesday is the Ivey purchasing managers' index for March. Thursday brings the March employment report with net change in employment, the participation and unemployment rates and average hourly earnings. 

US statistics March 23-27

Tuesday

The Redbook index of year-over-year same store sales for the March 20 week at 1.7% on the month  and 9.1% on the year were both better than the prior month, 1.1% and 8.5% respectively. They indicate for the stores polled, which represent 80% of the Department of Commerce’s retail sales figures, no drop in sales as yet from the public health crisis.

The Richmond Fed Manufacturing Index for March rose to 2 from -2 in February missing the 9 forecast.

Wednesday

Durable goods orders in February were stronger than forecast in the headline 1.2% vs -0.8% and in the ex-defense category 0.1% vs -0.9% and weaker ex-transport -0.6% against -0.4% and in the business capital goods group -0.8% vs -0.4%.

Fourth quarter GDP was unchanged as anticipated at 2.1%.

The Kansas City Fed Manufacturing Activity Index was much poorer than predicted at -18 on an estimate for 2 and the February score of 8.  It was the lowest reading since June 2015.

Initial jobless claims broke all records for the week of March 20 as 3.283 million Americans filed for unemployment benefits. This was more than four times the previous high from 1982 of 695,000.

The Michigan Consumer Sentiment Survey for March dropped to 89.1 on revision from the 90 preliminary score and 101 in February.

FXStreet

US statistics March 30-April 3

Monday

The Dallas Fed Manufacturing Business Index is forecast to climb to 6.2 in March from 1.2 the prior month.

Tuesday

The Redbook Index of same store sales for the week of March 27. The previous week had increases of 1.7% on the month and 9.1% on the year.

Conference Board Consumer Confidence is predicted to drop to 112.00 in March from 130.00 in February.

Wednesday

ADP employment change for March is projected to be down 150,000 after adding 183,000 jobs in February. It would be the first loss since October 2010.

The ISM manufacturing Index for March is forecast to be lower in the overall at 44.3 from 50.1, lower in employment 45.4 from 46.9 and higher in the new orders index to 50.2 from 49.8.

IHS Markit’s manufacturing index for March is predicted to be unchanged at 49.2 after revision.

Thursday

Challenger job cuts for March which tracks announced corporate layoffs is issued at 7:30 am EDT. They were 56,660 in February and 67,735 in January

Initial jobless claims for the week of March 27 are projected to be 3 million after last week’s record shattering total of 3.283 million crisis forced filings.

Friday

Non-farm payrolls are forecast to shed 123,000 positions for the first negative month in almost a decade and the unemployment rate is expected to jump to 4% from 3.5%. Average hour’s earnings will fall on the month to 0.2% from 0.3% and to be stable at 3% on the year.

The ISM Non-Manufacturing Purchasing Managers’ Index for March will fall modestly to 55.1 from 57.3, the new orders index will drop to 56.6 from 63.1 and the employment index will slip to 53.7 from 55.6.

US statistics conclusion

The past week’s economic numbers produced their share of horrors led by the astronomical initial jobless claims of 3.283 million which is expected to repeat this coming Thursday.

The other March numbers were mixed. The Rebook Index of retail sales rose in the March 20 week as did the Richmond Fed Manufacturing Index, though missing forecast and the Kansas City equivalent fell far more than expected. The Michigan Consumer Sentiment Index fell slightly on revision.

Jobless claims produced little effect in the markets as it had been widely anticipated and though a record was no surprise.

The coming week should produce more evidence of what the viral shutdowns have inflicted on the American economy. Initial claims, payrolls, unemployment and purchasing managers’ indexes in manufacturing and services are bound to be unpleasant but at this point markets have run so far ahead with their negative speculation and positioning that anything less than full-bore disaster might buoy market attitudes and bring a tinge of risk sentiment back to trading.

USD/CAD technical outlook

The fall in USD/CAD returned the relative strength index to nearly neutral after two weeks  in overbought territory.  All three moving averages are pointed higher with the 21-day tempered in its upward slope by the week's move. The 100-day average crossed above the 200 on March 11 the day the USD/CAD broke above its May 2017 high. 

Resistance: 1.4150, 1.4200, 1.4280, 1.4350

Support: 1.3950, 1.3800, 1.3660

USD/CAD sentiment poll

From last week's bearish sentiment in three time frames, the drop in the USD/CAD has moved the one week poll to bullish, not strongly, 46% from 30% and just over the 39% bearish view. The one month and one quarter opinions remain dominated by reversion to the overall March gains--23% bullish vs 70% bearish in the one month and 18% vs 73% in the one quarter. The forecasts, 1.3737 and 1.3585 seem to envision an end to the global pandemic.