USD/CAD Forecast: The divergence of the dollars

• Markit manufacturing PMI improves but remains weak missing forecast.
• BoC keeps rates steady, hawkish tilt citing stabilizing global economy.
• Ivey PMI soars after two months in contraction.
• Employment plunges in November, unemployment rate rises.

The Canadian dollar made an unusual round trip this week first gaining nearly a figure against the US dollar on the Bank of Canada’s mildly firm rate stance then losing almost all to a stellar American jobs report and a dismal Canadian one two days later.

The Bank of Canada’s relatively optimistic economic assessment on Wednesday gave the loonie its best day in over three months. Leaving its base rate at 1.75%, the highest in the developed world, for the ninth straight meeting the bank statement said its expectation for a recovery of global growth “appears to be intact.”  It called the domestic economy resilient supported by the consumer and housing.

“Future interest rate decisions will be guided by the Bank’s continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy,” noted the statement from Governor Stephen Poloz and the board.

Dollar Canada (USD/CAD) dropped from 1.3277 to 1.3232 in the first hour after the rate announcement and moved lower throughout the day closing at 1.3196 a figure below its open.

The Ivey purchasing managers’ index on Thursday supported the stronger loonie. It jumped to 60 in November, far higher than the 53.8 forecast and ending two months of sub-50 contractionary readings.

The Markit manufacturing PMI on Monday had painted a more circumspect picture rising to 51.4 in November from 51.2 but missing its 52.6 consensus estimate. Still it was the best reading in this gauge since January.

Then Friday.  The competing employment reports were released at the same time but that was about the only thing they had in common.

In the US non-farm payrolls jumped 266,000 in November, far above the 180,000 forecast and revisions to the two prior months added another 41,000. The unemployment rate dropped to 3.5%, a five decade low. Wages rose 3.1% on the year and the previous month’s gain was revised to 3.2% from 3.0%.  It was a stellar product by any measure.

In Ottawa it was the opposite. Net change in employment fell 71,200, a huge miss on the 10,000 increase projected and the unemployment rate jumped 0.4% to 5.9%, its highest since September 2018.

The reversal was immediate. Dollar Canada climbed from 1.3177 to 1.3245 in the first hour and continued to elevate through the morning.

Belying the dramatic action on Wednesday and Friday the ranges in the USD/CAD continued to shrink averaging just 63 points a day for the week.

Background to the market was the still pending US-China trade conversation.  Comments from both sides claimed that the negotiations were making progress and were down to the final issues of tariffs and guarantees, but those are assertions that have been bruited before.

The US deadline of December 15^th for the imposition of duties on the remaining uncharged Chinese imports may concentrate the representatives, or it may not. President Trump has said that in some ways he might prefer to wait until after the election to make a deal with China. Is that a negotiation tactic, an expression of frustration with the difficulty of the talks or a genuine possibility? No one knows.

For traders the consideration is simple. Success or failure in the trade negotiations will have an immediate and profound effect on all markets.  While a successful conclusion is largely priced in there is no assurance and hence the lack of trend or new positions.

Crude oil had a good week gaining 6.5% from the $55.60 open on Monday to $59.23 at noon on Friday largely on the possibility of larger production cutbacks coming out of the OPEC meeting in Vienna with Russia and other producers. Iraq has proposed an additional 400,000 limitation to the 1.2 million barrels a day enacted in January and set to run to March. Saudi Arabia is reported to be considering the proposal.

Next week is light for Canadian statistics with housing starts and building permits on Monday and the housing price index on Thursday. Neither is a major factor for markets though housing has been mentioned by the Bank of Canada as one of the economy’s thriving sectors.

In the US Wednesday brings CPI and the FOMC meeting. No change is expected in the Fed rate policy but the economic and rate projections will be of much interest as will Chairman Jerome Powell’s news conference. Friday sees retail sales for November.

The Fed “Projection Materials” and retail sales have potential for market movement. The stronger the Fed’s economic assessment for next year the better for the US dollar.  Fed funds interest rate futures do not show a majority percentage for a rate cut next year until the September meeting.  The comparison with the Fed’s own estimates will be instructive.  Consumption has been the main support for the US economy for three quarters. Retail sales will give an indication if the labor market continues to fuel robust spending. The stronger sales the better for the greenback and the worse for the loonie.

 

USD/CAD technical outlook

The trading range this week has broken no new ground for the USD/CAD.   The macro situation has changed somewhat with the contrasting US and Canadian employment reports on Friday. The excellent US results now give the American economy and US dollar the edge. Looming large just off-stage are the US-China trade talks, with the potential for inflicting major market movement depending on the outcome.  

The 21-day, 100-day and 200-day moving averages continue to point to upward momentum for Dollar Canada but with a flattening of the curve as the period lengthens.   The relative strength index (RSI)  dipped sharply lower on Wednesday abandoning its overbought position but the Friday recovery brought it back to neutral  where it closed. 

The upward channel initiated in late October was breached on Wednesday and the recovery has not re-entered the channel. The channel was not of long duration but this still a negative for the Dollar Canada.  

Major support and resistance levels for the USD/CAD have been unchanged for two weeks.

The first line is at 1.3050 with an extension to 1.3018, the low in October 2018.   There is another  band at 1.2900-1.2880 the reach of a series of lows late from August to mid-October 2018.

Above recent range the first resistance is at the 1.3330-1.3350 strip harboring the highs in the second half of the year.  It has been enhanced by rejecting the weak attempts of past two weeks. 

Between 1.3450 and 1.3475  is a series of levels  that were upper limit for many of the days from late April to early August. Though crossed numerous times the Dollar Canada only closed above the upper limit at the very beginning and the very end of the period.  

The next minor resistance is at 1.3525 just above the high closes in late May. The two-and a -half year top in December 2018 at 1.3685 was largely a function of December's limited liquidity and would not make for a substantial resistance. Likewise the brief high at 1.3800 in June 2017 and the spike to above 1.4600 in January 2016 are both too long ago and too short to provide reference.

Technical support and resistance lines are indicators of historical price action. They provide signs of trading interest at their designated levels but offer little impediment to any fundamentally based move. 

USD/CAD sentiment poll

Near term sentiment has switched to bearish (50% vs 25%)  from last week with a 100 point decline to 1.3208 in the one week forecast.  Medium term sentiment is now slightly bearish (52% vs 58%) at 1.3221 rather than 1.3241. The quarterly outlook has become  more negative in the rate projection 1.3167 vs 1.3241 even as the bearish  percentage has declined from 55% to 45% and the bullish percentage has dropped  to 21% from 30%.  Unusually the slack was taken up by the sideways choice 34% vs 15%.  

The overview chart  chart shows the late week reversal from the weak Canadian jobs report. Behind the limited volatility caused by the insecurity of the trade situation lies the perception that a US China deal would likely benefit the US Dollar over the Canadian.