USD/CAD forecast: Bulls lining up for advance back to 1.35 handle, eyes on BoC

• USD/CAD traded between 1.3356 - 1.3502, a lower high and low on the week.
• Trade risks impacting price of oil and commodity-FX.
• 20-D EMA supporting and daily stochastics underpin bullish bias.

This was the week: All eyes stayed on trade and geopolitics

USD/CAD traded between 1.3356 - 1.3502 week commencing 20th March, printing a lower high and low on the week. The FOMC minutes were pretty much brushed aside given that they came largely in line with expectations. However, there was a major focus on trade and global growth which weighed on the price of oil, commodities in general and commodity-FX which capped the Loonie's challenge of the interim rising support vs the Dollar, sending USD/CAD back to test the 1.35 handle.

The dollar was dented by the most severe slump in global PMIs and a terrible Durable Goods release. Subsequently, the bears picked up some ground into the closing sessions, sending the price back down to 1.3430 on Friday. However, there is a warning across the spectrum of risk assets considering that the poor PMI releases in advanced economies will continue to cast doubt about the outlook for the global economy in general.

Furthermore, the U.S. blacklisted Huawei which is a clear escalation of the trade war which puts the Xi-Trump meeting in June in jeopardy, leaving expectations of a prolonged trade spat between the two nations, also weighing on global growth sentiment. While China has not yet retaliated to the blacklisting of Huawei, a Chinese Commerce Ministry spokesman, Gao Feng, spoke up at a weekly briefing proclaiming that negotiations cannot go on until the U.S. 'correct their wrong actions'. He stressed that China is closely monitoring relevant developments and will 'prepare necessary responses'.

For the week ahead, the BoC could be the result the bulls need for a re-run of the 1.3520 highs considering the bank is unlikely to change their stance following April's formal abandoning of the hiking bias in their forward guidance where they also revised the 2019 growth forecast 0.5%. lower. Meanwhile, the pair is likely to trade between a range of 1.3100/1.4000 for the year - (Although the balance of trade risks implies that the pair will spend the majority of its time this year in a narrower 1.33-1.40 range).

Key CAD events:

Retail Sales on the headline jumped 1.1% to build on a 1.0% increase in February, although retail sale volumes were down slightly in Q1 as a whole, consistent with prior expectations for another soft quarter for consumer spending growth. "The data on balance is still consistent with GDP growth coming in at a sub-1% rate in Q1 but better reports later in the quarter also still leave the odds on a bounce-back to a 2% rate in Q2," analysts at RBC Economic Research argued.

For the week ahead, the attention will be on GDP and the BoC. Analysts at TD Securities, (TD), expect the BoC to largely reiterate their message from April in a short statement - "They will remain cautious on trade tensions as they await more clarity on US/China relations while the economy is unfolding in line with their forecast from April. That said, the Governor's recent media comments on the labour market tilts the balance of risks to a more constructive tone." Meanwhile, TD looks for GDP growth of 0.4% in Q1, unchanged from Q4 albeit with better details, assuming a rebound in both consumption and business investment.

GMT	Event	Vol.	Actual	Consensus	Previous
Thursday, May 23
12:30	CAD Wholesale Sales (MoM)		1.4%	0.9%	0.2% Revised from 0.3%
Wednesday, May 29
14:00	CAD BoC Rate Statement
14:00	CAD BoC Interest Rate Decision			1.75%	1.75%
Thursday, May 30
12:30	CAD Current Account			-13.50B	-15.48B
18:15	CAD BoC's Wilkins speech
Friday, May 31
12:30	CAD Raw Material Price Index				2.8%
12:30	CAD Industrial Product Price (MoM)				1.3%
12:30	CAD Gross Domestic Product Annualized (QoQ)			1.2%	0.4%
12:30	CAD Gross Domestic Product (MoM)				-0.1%

Key U.S. events:

• The FOMC Minutes and Fed speakers were the focus on the U.S. calendar. Indeed, there was, as expected, a majority of FOMC members expecting transitory low inflation shown by the minutes with an emphasis on patience. While downside risks to inflation expectations had been a potential concern, it is insufficient for now to induce a dovish policy stance. The minutes reflected a more upbeat economic outlook from many members in light of easing risks from Europe and China as well as a stronger-than-expected Q1-2019 US GDP print.
• Markit’s Preliminary US May PMIs dropped sharply. The Manufacturing PMI slipped 2 points to 50.6, its lowest levels since 2009. Markit’s US Services sector PMI also fell, by -2.1 points to 50.9, a three-year low. US New Home Sales fell -6.9% in April, a much larger than expected decline. US Jobless Claims continued to hover at generational lows for yet another week, 211k last week. Durable Goods on Friday arrived -0.9% vs -0.3% expected vs 0.3% revised, prior.

For the week ahead, U.S. PCE inflation readings will be the highlight where a steady 1.6% y/y inflation rate is expected by the market. However, the analysts at TD see risks skewed to a softer print.

USD/CAD technical analysis

Supported by the 20 D EMA in the last days of the week, the technical picture is leaning bullish with stochastics pulling back within a broader bullish trend giving more room to the upside again since the test of the 50% Fib and rising interim support failed beyond the lows of 1.3356.  Eyes stay on the 78.6% Fibo confluence of the 24th April highs at 1.3521. A break there brings in the case for 1.3660s and early Jan, YTD, highs ahead of an extension to the ascending channel's resistance at the 127.20% Fibo extensions of the range located at 1.3820. However, on a re-run to the downside and subsequent break of the rising support and 50% Fibo opens a  bearish argument for a test of the 38.2% Fibo, a touch below 1.33 the figure. A break below the 38.2% Fibo will bring in the 23.6% Fibo and trendline support (and 200-D SMA) where a break out opens risk back to 1.3070 support and 1.2780 below there.

USD/CAD Forecast Poll

The FXStreet forex poll of experts is a sentiment tool that highlights near- and medium-term price expectations from leading market experts and it shows a bullish bias near term turning bearish over time.