- USD/CAD started the week upbeat on trade talks difficulties but ended up reversing its course of action.
- Upbeat Canadian employment data helped Loonie rally to end the week, with headline inflation targeted as the main event next week.
- The pair's technical picture is still bullish, with 1.3380 as the key support.
This was the week: All eyes were on the Sino/US trade tensions, US CPI and Canadian unemployment
The week started out risk-off with commodity markets and commodity-FX thrown into a tailspin following the announcement from the U.S. that China has backtracked on prior points of agreement subsequent of previous trade negotiations.
The speculation was that the U.S. would cancel further trade talks due this week and impose extra tariffs - bearish for risk. The latter was indeed confirmed but trade talks had continued, ending on Friday. For now, talks are on hold but all has not been lost giving risk a lift into the closing bell on Wall Street on Friday. US Treasury Secretary Steven Mnuchin told reporters at noon that the talks had been constructive as he left the US trade representative’s office.
Subsequently, the Loonie has recovered its losses for the week, ending Friday +0.44% vs the greenback. In the background, US CPI and Canadian unemployment distracted traders from the trade headlines momentarily but having no lasting material impact on the price, although the pair had dropped to its lowest level since May 1 on the unemployment beat. The USD/CAD pair ended the week with little bias one way or the other against a neutral technical backdrop. Still, while the greenback remains the cleanest of dirty shirts in the laundry basket and going by the following BoC outcome, the outlook for medium-term USD/CAD has not changed, and the pair is likely to trade between a range of 1.3100/1.4000 for the year - (Although the balance of risks implies that the pair will spend the majority of its time this year in a narrower 1.31-1.38 range).
Key CAD events:
- According to the monthly data published by Statistics Canada, employment increased by 106,500 in April to beat the market expectation for an increase of 10,000 and the unemployment rate ticked down to 5.7%.
- Governor Poloz did not delve into the monetary policy outlook during Monday's speech on the mortgage market.
For the week ahead, headline inflation could be seen drifting higher to 2.0% year-over-year (y/y) in April following a rise in gas prices and CAD depreciation. "Core (ex. food & energy) prices should see a 0.1% advance, partly attributable to seasonal factors, while the BoC's preferred core measures are likely to hold at 2.0% y/y on average," analysts at TD Securities explained.
Key U.S. events:
Trade headlines took the spotlight and the flows in and out of the greenback left the DXY oscillating in a relatively tight range between 97.13 and 97.74, down -0.12% on Friday following headline CPI that came in a touch softer at +0.3% month-over-month (m/m) or 2.0% y/y. Core CPI met estimates at 2.1% y/y.
- US hiked tariffs to 25% from 10% on $200B Chines goods.
Looking ahead, this week will offer U.S. Retail Sales and a range of Fed speakers will likely bring the Fed rade back into the mix.
As per Retail Sales, analysts at TD Securities noted that the main driver behind a 0.3% m/m rise in the headline measure for April is expected to be another firm increase in sales in the control group. "This rise would represent a mean-reversion in growth after a 1.6% jump in March that likely reflected a normalization in tax refunds. We also anticipate a 2.5% decline in auto sales to represent a downside risk to the headline."
USD/CAD technical analysis
The price is moving higher in a bullish channel of which the downside was recently exhausted last week and bulls indeed went onto to test the descending interim resistance formed between 2nd Jan spike and 24th April highs. A break of which would expose the 78.6% Fibo confluence of the 24th April highs and bring the case for an extension to the ascending channel's resistance at the 127.20% Fibo extensions of the range located at 1.3820 on the wide. In the near term, there is no bias one way or the other until either the 38.2% Fibo or said 78.6% Fibo give out. However, bulls have failed to break up on three occasions and stochastics lean bearish, opening the case for a near term test of the 38.2% Fibo down a touch below 1.33 the figure. A break below the 38.2% Fibo that 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.
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