USD/CAD Forecast: An exception to the USD fall

• BOC cuts overnight rate 0.5% matching the Fed.
• Largest single reduction since March 2009.
• USD/CAD level on the week defying weaker greenback.

The Dollar Canada was essentially unchanged on the week defying the general market trend for a weaker US currency on the back of plunging American Treasury rates.

 The USD/CAD closed on February 28^th at 1.3422 and following Monday’s drop of just under a figure to 1.3335 ended higher on three of four subsequent days: Tuesday 1.3370, Wednesday 1.3394 Thursday 1.3419 and 1.3414 on Friday          .   

The main blow for the Canadian Dollar was the Wednesday decision by the Bank of Canada (BOC) to cut the overnight rate by 50 basis points to 1.25%.  After the unexpected Reserve Bank of Australia (RBA) 0.25% reduction in the cash rate at its scheduled meeting on Tuesday was followed by the Federal Reserve’s emergency 0.5% decrease later that day, the BOC decrease at its scheduled meeting had become almost mandatory.   

In the note announcing the cut the bank specifically cited the risks for the virus. “While Canada’s economy has been operating close to potential with inflation on target, the COVID-19 virus is a material negative shock to the Canadian and global outlooks, and monetary and fiscal authorities are responding.

In the two hours after the 10:00 am release on the 4th the USD/CAD add a figure from 1.3333 to1.3427.

Canadian Statistics March 2-6

The February purchasing managers’ index for manufacturing from Markit Economics of London on Monday rose to 51.8 from January’s 50.6. It was highest score for the factory sector in year.

Job creation in February was disappointing with just 10,000 new positions listed by Statistics Canada less than a third of the January total of 34.300. The unemployment rate ticked up 0.1% to 5.6% and annual average hourly wages fell to 3.72% from 4.43% in January.

The Ivey PMI for February fell as forecast to 53.6 from 57.3. This index has bounced around over the last six months, jumping to 60 In November after two months below 50 at 48.7 in September and 48.2 in October, then reversing to 51.9 in December.

Statistics conclusion

The BOC’s rate cut was the effective verdict on the Canadian economy in the first quarter.  As the bank said, “It is becoming clear that the first quarter of 2020 will be weaker than the Bank had expected.”  At the prior meeting the governors had warned of the rising risk of a slowdown.  Those predictions appear to be coming true.

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Canadian statistics March 9-13

Housing starts on Monday are expected to moderate in February to 205,000 on the year from 213,200 a month earlier.  The sector had been, in what seems like a lifetime ago but was really only two BOC meetings, cited as evidence of a resilient Canadian economy.

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US statistics March 2-6

American statistics though plentiful and generally good played second or maybe third fiddle to the Fed and the credit markets.

The manufacturing purchasing managers’ index for February on Monday at 50.1 missed the 50.5 forecast and just remained in expansion after January’s surprise vault to 50.9 following five months of contractions. New orders slipped below 50 to 49.8 as predicted, from 52 in January, like the overall gauge, the first expansion score since August.  The employment index provided a small surprise rising to 46.9 in February on a 46.6 estimate, from 46.6 the previous month.

Construction spending in January more than doubled its 0.7% forecast at 1.8% and December was revised to 0.2% from -0.2%.

The Fed unanimous vote to cut the base rate by 0.5% announced at 10:00 am on Tuesday  just after the equity market opened was, as the BOC cut, specific to the “evolving risks to economic activity” posed by the Coronavirus.  A rate decrease had been almost universally expected at the FOMC meeting in two weeks and its early arrival did nothing to improve the day’s equity or credit trading where the Dow lost 786 points and the 10-year Treasury shed 16 points closing at 1.001%. 

Former Vice-President Joe Biden’s victory in the day’s Super Tuesday primary voting against Bernie Sanders the self-proclaimed democratic socialist Senator from Vermont sent both markets into reverse on Wednesday with the 10-year gaining 5 points to 1.06% and the Dow soaring 1173 points its second  largest one day gain on record. The record of 1,293 points had been set two days earlier on Monday.

Wednesday’s service sector PMI was notably better than forecast, especially given the two month old viral crisis. The overall score from the Institute for Supply Management at 57.3 for February was up from 55.5 prior and ahead of the 54.9 estimate. New orders forged higher to 63.1 from 56.2, skipping past the 56.3 predictions with the best reading since June 2018.  Even the employment index improved more than predicted to 55.6 over at 54.1 predictions and January’s 53.1.  

The Fed Beige Bok prepared for the March 17-18 FOMC said that the economy expanded at a “modest to moderate “rate over the six seeks since it last editions.  

Initial jobless claims on Thursday rose to 216,000 in the week ending February 28^th, but the 4-week moving average of 213,000 remains at the extreme low end of the range for the past five decades.

The Labor Department’s Employment Situation Report for February on Friday confirmed that the US economy, despite the near panic in the trading markets over the Coronavirus has continued to create jobs and income for US workers.

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US statistics March 9-13

A relatively light week in the States

Consumer prices for February son Tuesday will provide an indication of where the Fed’s preferred PCE gauge will be later in the month. Headline CPI is forecast to flat on the month down from 0.1% in January and annul price gains are expected to drop to 2.3% in February from 2.5% prior. Core rates are expected to be stable at 0.2% on the month and 2.3% on the year.

The Michigan Consumer Sentiment index for March on Friday will give the first good reading on the reaction the Coronavirus that has so roiled markets. Sentiment is forecast to fall to 97 in March from 101.

Statistics conclusion

Traders are primed for confirmation that the dire economic situation that they see ahead is real. Better to discount for the danger than be caught napping.

Weaker than forecast data will accentuate the present equity, credit and dollar trends but, as with the US service ISM numbers, good news will have to build a critical mass before it affects market attitudes.   Analysts are waiting to see if March data confirms the US, Canadian and global slowdown.

With the Fed and the BOC cancelling each other Canada's relatively weaker economic position as a resource provider and her recent domestic political problems have negated the US dollar liability from plunging Treasury rates. 

USD/CAD technical outlook

This year's rise in the Dollar Canada has put the relative strength index(RSI)  near to an overbought position but the market response to this technical hint is not likely to be a greater desire to sell until the fundamental and event picture is clear. 

The 21-day and 100-day moving averages reflect the 2020 climb in the USD/CAD whereas the 200-day remains indebted to the third and fourth quarter declines last year. 

Initial resistance begins at 1.3440 the high on Monday, Thursday and Friday followed by a weak line at 1.3465 the top on February 28.  Above there were have 1.3505 1.3525 and 1.3570 relating to late April to early June trading last year.

Support is of more recent vintage.  First  is at 1.3385 from top and bottom action subsequent to February 27, then a weak line at 1.3350 and a more substantial one at 1.3325.  Beneath that are strong lines at 1.3270, 1.3210 and 1.3160.

USD/CAD sentiment poll

The range bound trading this week, at least in comparison to USD/JPY and EUR/USD, has left the sentiment and forecast views largely intact.

The one week outlook remains bullish, 42% vs 50%, with an identical bearish tilt at 25% and a bit more uncertainty, 33% vs 25%. The forecast at 1.3412 would be unchanged from Friday's close.

The one month view stays bearish with the bullish side down to 19% vs 25%, the bearish ahead but lower 59% vs 68% and neutral rising to 22% from 7%. The forecast moves to 1.3290 from 1.3312.

The one quarter view also stays bearish. The bullish view rises to 25% from 22% but the bearish opinion remains dominant at 69% vs 72% and neutral is unchanged at 6%.  The 1.3248 forecast is little different from 1.3227.

In the Dollar Canada, unlike the other majors, the week's developments in statistics and the US Treasury market did not provide direction.   The forces acting on the USD/CAD, falling US bond rates and a stronger economy in the United States remain roughly balanced.  The atmosphere is volatile and changes on either side of the border could move the currency pair.