USD/CAD forecast: A stonker of a week ahead event wise, short-side profit taking could ensue

USD/CAD's breakout below the longterm trend line could be due a correction in the coming week, especially ahead of key events and month-end – (Profit-taking might be expected). However, the continued recovery of optimism in the geopolitical sphere would likely weigh in the CAD's favour but considering the ebbs and flows, it could be time for a correction of the same. W

e have a number of critical events scheduled for the week which include, both the Bank of Canada (BoC) and the Federal Open Market Committee (FOMC), Canadian Gross Domestic Product (GDP), Brexit (31st Oct) and Chinese Manufacturing PMIs – All of which are bound to shake things up. However, oil prices have perhaps not much further to run, with the price of  West Texas Intermediate, (WTI) embarking on the 200-day moving average and fundamentally, demand fears and expected production growth outside of OPEC suggest far higher surpluses into 2020 despite OPEC+ best efforts. CAD is highly correlated to the price of oil, so it should be one to watch.

This was the week

Oil prices continued to recover on the week, rising to a fresh high in West Texas Intermediate, scoring through the $56 handle and to the highest levels since the 27th September – Supportive of the Loonie. However, this rally could be just about done, for the reasons mentioned above. The mood in oil markets improved on the sentiment that OPEC + will indeed curb global production. Also, signs of a slow down in deteriorating global growth due to the prospects of a trade deal between the US and China was supportive – Subsequently, WTI has breached the 21 and 50-day moving averages, rallying in four consecutive days and travelled over 7.5% high on the week. 

Meanwhile, the backdrop for the Loonie has been furnished with positive economic performance on a domestic basis. The prior week was a solid Manufacturing Sales number and this week was a positive Bank of Canada Business Outlook Survey. 

The Canadian Federal elections were also a slight positive for the Loonie, with Justin Trudeau’s Liberal party clinging on. However, the move in the CAD was rather muted, likely due to attention being paid elsewhere, to a Brexit deal, US-China negotiations, as well as the upcoming Fed and BoC meetings. Meanwhile, USD/CAD has sustained an advance below trendline support and travelled over 0.6% to the downside. 

Key CAD events

The Bank of Canada's (BoC) Business Outlook Survey (BOS) on October 22nd was moderately constructive and showed stable expectations for future sales and inflation, "while investment intentions ticked higher despite the drag from trade tensions," analysts at TD Securities explained. 

Looking ahead, the BoC is the one to watch along with GDP:

The BoC and GDP will make for a one-two punch next week. The Bank is widely expected to leave rates unchanged and we look for similar messaging in the policy statement. This will put the focus on the Bank's forecasts where downgrades to the 2020 outlook could provide a catalyst for rate cuts. For GDP, we look for a 0.1% increase which would leave Q3 tracking near BoC estimates 

analysts at TD Securities explained.

Key U.S. events:

Durable Goods Orders were a disappointment and weighed on the US Dollar ahead of the FOMC. The Fed is expected to lower rates by 25 basis points again for the third consecutive month since July's meeting:

"The FOMC is likely to communicate patience in deciding future policy moves after next week's cut as they assess the impact of the three cuts they have already delivered. We look for the Fed to temporarily pause before resuming rate cuts in Q1 2020,"

the analysts at TD Securities explained. 

USD/CAD Technical Analysis

USD/CAD extended the downside following the dro from the middle of the month where bears stepped in at the 200-day moving average, sending funds through the 21 and 50-DMAs as well as the 38.2% Fibonacci, the 23.6% Fibonacci of the May - July range and now the 1.31 handle and trendline support. At this juncture, it might be expected to find some support coming in before the next leg to the downside as bears tire in oversold territories on a busy schedule for the week's calendar. Therefore, an upside profit-taking target could come in at the prior 10th Sep lows. However, committed bears will look to the July lows and the commitments of the bulls at 1.30 the figure. 

USD/CAD daily chart

USD/CAD Forecast Poll

The FX Poll is showing a moderate bullish bias in the short term and a substantial rise in the 1 month, tailing off as time goes by but maintaining a bullish bias longer term. The price range, however, is limited to just 112 pips over the same time period.