USD/CAD Forecast: Modest greenback comeback

• Reasonable US statistics push dollar higher against the loonie.
• Canadian dollar drops to weakest close since December 10th.
• GDP surprises in November, avoids back-to-back losses.

The USD/CAD edged higher throughout the week opening at 1.3148 on Monday and closing at 1.3188.  The Tuesday close was 1.3166, Wednesday 1.3204, Thursday 1.3193 and Friday moved back above 1.3200 to 1.3230 in mid-morning action on Friday. 

The starting point for the week’s action was essentially the top of the run higher on last Wednesday the 22^nd after the Bank of Canada kept it base rate at 1.75%. It wasn’t the rate decision which was widely forecast but the admission that the bank expected growth to be weaker than at its last projection in October.  Its statement also dropped an assertion that the current rate was appropriate that it had used since last April.

Canadian and US Statistics, January 27-31

Friday’s November GDP was the only Canadian statistic of note and the 0.1% figure was better than the October -0.1% reading and the flat expectation but it had no import for the loonie.

American economic information was the driver this week.  Tuesday’s durable goods orders for December were mixed with the headline up 2.4%, much stronger than 0.5% forecast on a surge of Defense Department procurement. Business spending remained moribund and non-defense capital good orders dropped 0.9% on a flat prediction.

The Fed rate decision on Wednesday was status quo on the fed funds and almost universally expected but a modestly optimistic Jerome Powell did the dollar no damage.  His acknowledgement of the potential economic impact of the China virus briefly stirred markets but to no lasting effect.

Thursday’s fourth quarter GDP came in at 2.1% as forecast but in the context of durable good orders supported by government spending, which had led to some speculation for a weaker number, it was a good statistic for the dollar. Initial jobless claims four-week moving average for the January 24 week at 214,500 held at near 50 year lows indicating no change in the labor market.

Friday’s personal income for December at 0.2% missed the 0.3% prediction and November was revised 0.1% lower to 0.4% and personal spending, more important for the consumer fueled US economy, rose 0.3% as expected.  The core personal consumption price index, the Fed’s well known favorite was 1.6% on the year and will provide the central bank with no incentive to change policy.

Canadian statistics, February 3-7

The London firm Markit Economics delivers its manufacturing PMI on Monday with a drop below the 50 expansion –contraction limit to 49.6 heralded. If correct it would be the first negative month since August.

Exports, imports for December and international merchandise trade hit on Wednesday and though of interest to analysts they are not market events.

Friday is Canadian January labor market data.   The key number, net change in employment, has had a very uneven second half with three positive and three negative months and a 12,130 monthly average for the term compared to a 41,250 in the first six months of 2019.  The unemployment rate is forecast to rise to 5.8% from 5.6%.

Ivey PMI for January is projected to rise to 53.3 from 51.9.

The employment information is important for the Canadian dollar particularly in the context of the Bank of Canada’s weakening outlook for the economy. A better than expected number will provide support to the degree that it is not overshadowed by the US payroll figures released at the same time.

US statistics, February 3-7

Manufacturing has been the primary victim of the trade war with China. January’s PMI number on Monday is probably too soon to give the first glimpse of the post-agreement world. A slight rise to 48.0 is expected from December’s 47.2 which was a decade low.  Any substantial deviation in the PMI has potential for dollar impact, especially if better than forecast since that is the speculative direction following the trade deal.

Wednesday’s ADP private employment for January is the precursor to the NFP report on Friday and 155,000 is forecast after December’s exceptional 202,000. This is NFP writ small and market’s respond accordingly.

Non-manufacturing PMI for January, also at mid-week, charts executive sentiment in the dominant service sector.  Business here had a much smaller drag from China and the index has never approached 50, the low being 52.6 in September.  Little change is expected with 55.1 after 55.0 in December.

Payrolls on Friday is the US economy’s big gun.  Job creation is forecast to be 156,000 in January following December’s slightly (very) disappointing 145,000.  Annual wages will rise back to 3% and the unemployment will remain at its record 3.5%.

As every month the NFP numbers are the most watched and traded US statistic. The reaction is straightforward.  Higher jobs and wages and lower unemployment boost the dollar and the reverse.

Statistics conclusion

In the competition between Washington and Ottawa statistics this week the Americans are likely to have the edge. The US labor market has been more consistent in producing jobs and the less export and resource based nature of its economy provide more insulation from global trends.  If the US-China pact performs as anticipated and if and when the China health crisis abates Canada stands to benefit equally, but not until.  The US dollar should have the statistical advantage this week.

USD/CAD technical outlook

The USD/CAD has returned over the course of January to the middle of its June to December range. 

The 21,100 and 200 day moving averages have diverged. The 21 is now pointing higher, the 100 is flat and the 200 yet reflects the December decline.  Unless there a reversal time will bring all three back in agreement pointing higher. 

The up channel that formed in early January in reaction to the late December drop is butting against it upper limit which obtains small additional resistance from the 200-day moving average intersection.  The biggest one day move in the January ascent was on the 22nd when the BOC released its new weaker economic assessment.  The relative strength index is well above the neutral point but as the USD/CAD is mid-range it is unlikely to predict near term selling interest. 

First resistance above is at 1.3260 where two shoulders formed in the November to December pattern.  Next are moderate lines at 1.3325 and 1.3350. The first is the top of the head and shoulders pattern and the second at the October highs. A weak line sits at 1.3380 the spike top in early September but also a series of lows from April to June. Beyond that is another weak line at 1.3450 the top in June and for a month from early March to early April. The late April to late May line is next at 1.3500 followed by the 2019 high at 1.350, ignoring the spike on May 31st to 1.3566,

Beneath we start at 1.3125 the bottom of the post-January BOC move, then 1.3075 the top from January 10 to January 21 followed by 1.3030 the bottom of the same period but also in July which greatly enhances its strength.  Lastly 1.3000 and 1.2950 both weak which mark the upper and lower limits of the December plunge. 

USD/CAD sentiment poll

Not unexpectedly short term prospects have moved higher. Bullish sentiment has increased to 54% from 46% in the one week with bearish dropping to 38% from 46% with sideways unchanged at 8%. The forecast has gained more than a figure to 1.3245 from 1.3128. 

In the the one month view analysts are unconvinced. The bullish sentiment falls to 26% from 35%, the bearish rises to a strong 61% from 35% and neutral falls to 13% from 30%. The forecast rises marginally to 1.3146 from 1.3110 but more interestingly is a figure below the one week prediction. Clearly the rise above 1.3200 is not viewed as permanent. 

The quarter projection reflects the one month at 1.3125 slightly above last week's 1.3096 but below current value. Bullish sentiment is a bit stronger at 26% from 21% , bearish is substantially stronger at 54% from 40% and sideways is less certain at 20% from 39%. 

The clear takeaway is that our poll responders do not expect the immediate USD/CAD strength to last.