- USD/CAD remains within its six week three figure post-pandemic panic range.
- Support at 1.3900 hold firm after third test, USD/CAD gains 1.3%.
- Minor return of USD risk aversion on poor US retail data.
- WTI rises 20% on the week to highest close since March 13.
The USD/CAD rose modestly on the week but remained ensconced in its post-panic range reversing smartly at the 1.3900 support the session after reaching it. It was the third repeat of the unusually consistent pattern since April 14.
Trading in the pair is caught between the decline of the factual basis of risk-aversion as the US and European economies begin to reopen and the lingering emotions of the market panic supported by the knowledge that though the pandemic is improving it could return and the depth of the economic calamity it as yet unplumbed. Markets are not ready to declare the emergency over.
Trade rhetoric between the United States and China became more acrimonious as Washington imposed new restrictions on Huawei’s use of American technology saying the mainland tech giant is a security risk and Beijing responded by calling the measures an abuse of state power and a violation market principles. Two weeks ago both sides had voiced their commitment to fulfilling the terms of the January trade agreement.
West Texas Intermediate gained 20% on the week closing at $29.43 on Friday its best finish since March 13. The June futures contract expires on Tuesday and so far there no indications of last month’s historic panic that drove the May contract to $ -37.73 as holders had pay to be relieved of their exchange obligation take delivery. With many nations slowly lifting economic and travel restrictions there are incipient signs that demand is starting to recover.
The VIX, the Chicago Board Volatility Index (.VIX) rose 12% ending the week at 31.89. Last Friday’s close at 27.98 had been the lowest since February 26 and is a 75.9% retracement of the February 19 to March 18 range (14.21-85.47, not a standard Fibonacci level).
The US dollar received official support on Thursday from one usual and one unusual source. Federal reserve Chairman Powell said that the bank will use its full toolkit to avoid a “prolonged” economic downturn but those tools do not include negative interest rates. He noted that the Fed “doesn’t see much benefit to them.”
President Trump also talked up the dollar in the context of US economic recovery, saying it’s a good time to have a strong dollar now with low interest rates, even if it’s tough for trade.
Risk-aversion has evolved from a rationale for driving the dollar and US assets higher as it was in the latter part of the March panic to a reason for not selling off the remainder of the greenback’s risk premium.
In the USD/CAD that limit is currently at 1.3850-1.3900 band that has rejected three attempts in the past month. The USD/CAD pandemic risk premium extends down to 1.3400-1.3450 and was traversed quickly in six sessions from March 9 to March 16.
The acute phase of the risk panic ended six weeks ago, but the return to pre-virus ranges awaits evidence that the pandemic has run its course, and that the economic damage can be reversed.
Canadian statistics May 11-May 15
Manufacturing sales plunged in March 9.2%, almost double the -5.7% prediction and matching the largest prior one month drop in the 39 year history of the series in the history in December 2008.
Canada statistics conclusion
Manufacturing sales for March and the pending data in the week ahead, March CPI on Wednesday’ ADP April employment change on Thursday and March retail sales on Friday will help define the current economic debacle but they are only details to a picture already well established and unlikely to provide markets with trading information.
The next step in the statistical saga is to see if the May data shows improvement but that will not start until the first week of June.
US statistics May 11-May 15
In the US core CPI fell 0.4% in April its largest one month drop on record and the annual rate fell by one-third to 1.4% from 2.1%
The two major numbers performed as mostly as expected. Initial jobless claims in the May 8 week were 2.981 million more than the 2.5 million estimate, though lower than the prior 3.176 million and down 54% from the 6.867 million peak. Continuing claims were 22.833 million, considerably below the 25.1 forecast but up from 22.377 million the previous week.
Continuing claims are becoming the arbiter for the labor market. As many states begin to end their business and social restrictions rehired workers should reduce the number of continuing claims beyond additions from new initial claims.
Retail sales for April plunged 16.4% half again as much as the 12% forecast and double the March 8.3% drop. Sales have now fallen almost twice as much in the last two months, 24.7%, as they did in the half year leading to the financial crisis, July to December 2008. The control group category that reproduces the consumption component of GDP, fell 15.3% far more than the -4.6% forecast and five times the March 3.1% decease.
One positive note was preliminary Michigan Consumer Sentiment for May at 73.7. It was better than the 68 forecast and the April reading of 71.8. The measure of current conditions registered 83, well over the 75 estimate and April’s 74.3. Only the gauge for expectations at 67.7 was weaker than its estimate, 71.8 and the April 70.1 score.
US statistics May 18-May 22
USD/CAD technical outlook
The slight positive aspect to the relative strength index (RSI) is the upper portion of the five week rotation between 1.4200 and 1.3900.
The cross of the 21-day moving average on Tuesday and its intersection on Thursday and Friday may provide some limited for the USD/CAD. The longer averages have yet to catch up with the March rise and subsequent ranges.
Resistance: 1.4150: 1.4220; 1.4270; 1.4350; 1.4500; 1.4570
Support: 1.4010; 1.3915; 1.3855; 1.3805; 1.3625; 1.3460; 1.3400; 1.3330
USD/CAD sentiment poll
The bearish tilt to the one week is a reaction to the week's gains and the distance to the first support at 1.4010. The bullish cast in the one month and one quarter are weak, barely above the Friday close at 1.4110 and a reflection of the consistent ranges of the last six weeks.
The forecasts show no expectation for a range breaking development out to the quarter, which is surprising given the amount of risk premium in current level and range. It would not take that much for markets to decide that the panic response is passe.
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