USD/CAD forecast: Is that normality on the far horizon?

• Improving global risk outlook aids Canadian dollar.
• US-China trade agreement implementation talks upbeat.
• Loonie closed at week’s high on Friday, approaching the April 30 pandemic high.
• WTI consolidates as OPEC+ deal supports prices.

The Canadian dollar had a good week aided by improvements in several long term factors that augur a budding return to economic normality.

Implementation talks between the US and China for the trade deal signed in January were reported to be making “good progress” by both Chinese and US officials.    

“They [US and China} also agreed that in spite of the current global health emergency, both countries fully expect to meet their obligations under the agreement in a timely manner," said the statement from US Trade Representative Robert Lighthizer.

China has largely reopened its economy and as the US slowly restarts the agreement with its mix of trade liberalization and purchase guarantees, will assist both nations in reviving their economies.

Oil prices consolidated at mid-April levels. West Texas Intermediate (WTI) closed at $24.74 on Friday as the OPEC and Russian deal to cut 10 million barrels a day of production which took effect on May 1 appears to have put a floor under prices.

Global economic closures are slowly ending. In Europe Austria and Germany have begun liberating commercial life while the Italian, British and French governments are discussing similar measures.  In the United States a number of states have partially lifted local restrictions on business activity while keeping various degrees of social distance advice in place.

The horrendous though not unexpected US and Canadian employment reports for April did not thrust markets back into risk aversion panic. Despite the astronomical employment casualties on both sides of the border, though the Canadian job losses were half the forecast, US and Canadian equities rose, US Treasury rates climbed and the US dollar was lower in all six major pairs.

The Bloomberg Commodity Index ended at 62.32 on Friday, its best price since April 14.

Finally the VIX, the Chicago Board Options Exchange (CBOE) Volatility Index, finished at 27.98 on Friday its lowest close since February 26.

Reuters

Canada is a resource based economy and the largest trading partner of the United States. As the world economy and the US slowly recover from the pandemic the prospects for Canada’s mining, extraction and manufacturing industries and overall economy can only brighten.

USD/CAD outlook

The risk aversion panic in the USD/CAD took place in two waves.  The first ran from the close on March 6 at 1.3421 to the 1.3804 finish on March 13 and set the stage and established the lower limit for the next seven weeks.  The second began at the March 16 open at 1.3788 and lasted until the 1.4463 close on March 24, passing through the 1.4468 high on March 19.  The two figure fall on March 25, opening at 1.4463 and ending at 1.4191 defined the upper limit of the range for the next six weeks, around 1.4200, while the lower limit of roughly 1.3900 had been set on March 13.

We are approaching the lower limit of the pandemic range at the Friday close at 1.3926. The five figure range beneath was sparsely traded in the rush to buy US dollar and assets at almost any cost.  It is ripe for reversal.

The pandemic risk premium for the USD/CAD begins at 1.3400. That is the scope for improvement over the next several weeks in the Canadian dollar.

Canadian statistics May 4-May 8

Tuesday

The trade deficit was C$1.41 billion in March, less than the C$ 2 billion forecast.

Thursday

Ivey purchasing managers’ index for April was 22.8 missing the 25 estimate. It and March at 26 were the lowest reading on record in the 21 year series.

Friday

The employment change and unemployment rates in April were not nearly as bad as predicted.  Employment dropped 1,993,800 half the 4 million prediction and the jobless rate rose to 13% from 7.8% in March, much less than the 18% projection. The participation rate fell to 59.5% from 63.5%.

Housing starts were 166,400 annualized in April, down from 195,200 in March but much stronger than the 110,000 forecast. Building permits were off 13.2% in April from -7.3% the prior month but better than the -20% estimate.

FXStreet

Canadian statistics May 11-May 15

Thursday

Manufacturing sales in March are expected to fall 5.8% after rising 0.5% in February.

Canadian statistics conclusion

The much better, though one hesitates to use the adjective, job report on Friday along with its US counterpart helped markets discount the absolute number of job losses. Equites rose in New York and Toronto and the pandemic risk premium continued to drain from the US dollar.  It is possible that greater job destruction is ahead in May, but it is also possible that the worst is past and as Canada and the US reopen, future losses will be lower.

US statistics May 4-May 8

FXStreet

US statistics May 11-May 15

FXStreet

USD/CAD technical outlook

The slightly negative relative strength index may move to oversold if the support band at 1.3860-1.3900 is broken but with limited support beneath the indicator will be of limited use until 1.3600.   The cross of the 21-day average on Thursday is a sign that changes may be coming to the USD/CAD. The 100-day average and the 200-day average are just below support at 1.3620 and 1.3422. It is quite possible the averages will not reach those lines. 

Resistance: 1.4000; 1.4080; 1.4160; 1.4210; 1.4360

Support: 1.3860; 1.3785, 1.3620; 1.3422, 1.3340

USD/CAD sentiment poll

The uniformly bullish aspect reflects the security of the trading range of the last six weeks. The USD/CAD has dropped below 1.4000 three times in the last five weeks, twice for extended periods but has not challenged the 1.3860-1.3900 support band.

That reluctance is a product of the large amount of risk premium still contained in the US dollar. The premium may be subject to rapid restatement if European and North American economies begin to show signs of revival or the USD/CAD drops through support at 1.3785.