USD/CAD Forecast: Trading gaps will be filled despite the US-China arguments

• USD/CAD cracks two month support line at 1.3860.
• Canadian first quarter GDP better than predicted.
• USD/CAD set to drop further as risk trade erodes, global economy reopens
• Little support beneath in the USD/CAD down to the pandemic panic take off point of 1.3430.
• WTI gains 86% from an-18 year opening low on May 1.
• US-China disputes do not reignite risk-aversion dollar trade.

The USD/CAD broke its two month support line at 1.3860 on Tuesday aided by the continuing retreat of pandemic pricing in the US dollar and an 86% gain in West Texas Intermediate in May.

After trading to support three times and just shy twice more in the past 60 days the pair traversed the 1.3860 line in early New York trading  on Tuesday with one fast 10 minute swoop from 1.3864 to 1.3833 as stops below the support line activated. The significance of the break kept the pair moving lower to 1.3753 on Tuesday and1.3723 on Wednesday with a final dip to 1.3710 on Friday morning before rebounding to 1.3832 and closing the week at 1.3769.

            The somewhat unusual combination of fundamental and technical motivation proved conclusive for the USD/CAD.  Support at 1.3860 had been clearly defined by approaches followed by sharp rebounds on April 13, 14 and 15, again on April 29 and 30 and once more on May 19, 20 and 21.  After each attempt the high was progressively lower 1.4265 on April 21, 1.4173 on May 7 and 1.4049 on May 22. The declining series of tops is a classic indicator of market intent.

Risk-aversion support for the US dollar helped define the lower border for the USD/CAD after the March surge.  It took two months for the gradually improving pandemic conditions in the US and in Europe to allay market fears of a virulent second wave of infections. The US-China war of words over the pandemic and President Trump's announcement that Hong Kong's favored nation trade status would be removed did not restart the risk-aversion US dollar trade. 

A steady rise in oil prices after their historic collapse into two day negative values in the May WTI futures contract was inevitable as that event was both anomalous and without predictive value.  Reuters

Although WTI opened the month at an 18-year low of $19.04, the close at $35.49 has much more recent history. Prices were at or below that level for most of January and February 2016.   Price recovery was driven initially by the fundamentally absurd negative valuation and the two-week run below $20.   Demand for the world’s basic energy source was never going to drop permanently to the level predicted by a sub-$20 barrel price.  

Reuters

Canadian GDP was modestly better than forecast at -7.2% monthly in March on a -9% prediction, -8.2% annualized on the quarter, under the -10% prediction and may have provided a temporary boost to the loonie. Second quarter GDP is still expected to be horrendous.  Raw material prices declined 13.4% in April, slightly better than the 15.6% drop in March.

USD/CAD outlook

With most of Europe and the United States reopening their commercial and social lives the depths of April and May will be the bottom for the second quarter and will set historic records for an economic collapse.  Central banks, particularly the Fed, continue to provide massive amounts of liquidity to the global economy helping to underwrite the equity recovery and restraining interest rates.

Market assessment has moved to the recovery and absent a large scale return of the virus and reimposed economic closures the US dollar risk-premium will continue to erode.  

There is little support between the current level in the USD/CAD and the pandemic panic launch point at 1.3400.  That more than three-and-a-half figure range was traversed in just four sessions and includes a more than two figure gap from the close on April 6 at 1.3421 to the open at 1.3624 on April 9.  The hoary trading adage, ‘gaps will be filled’ should get a new lease on life.

The Bank of Canada’s policy meeting on Wednesday will be important for incoming Governor Tiff Macklem’s statement on the conditions and future of the economy but not for any change in the 0.25% base rate or attendant policies.  Stephen Poloz the current Governor will end his second term on June 2.

Friday’s Canadian employment report is expected to produce a 500,000 drop in payrolls in May after the 2 million decrease in April.  The unemployment rate is expected to rise to 15% from 13%.

These predictions will compare favorably with the US forecasts of -8.25 million in payrolls and 19.7% unemployment and though they will assist the loonie higher, they will not be the primary or even secondary reason for the decline in the USD/CAD.

Canadian statistics May 25-May 29

Wednesday

Building permits in April dropped 17.1% after falling 13.4% in March.

Friday

The raw material price index for April fell 13.4% in April, a slight improvement from the 15.6 March decline. Industrial product prices fell 2.3% in April following the 0.9% decline in March.

Annualized GDP shrank 8.4% in the first quarter a bit less than the -10% forecast.  Fourth quarter GDP was revised to 0.6% from 0.3%.  Quarterly GDP fell 7.2% on a -9% prediction. The fourth quarter was revised to 0.1% from flat.

FXStreet

US statistics summary May 25-May 29

In the US the April figures were dismal though there were spots of encouragement.

New home sales in April rose 0.6% far outstripping the projected 21.9% decline and March’s revised 13.7% decline.

Consumer confidence from the Conference Board, the longest running tracker of American attitudes rose in May to 86.6 from 85.7 in April and the Michigan survey edged higher to 72.3 from 71.8.

First quarter GDP was revised to -5% from -4.8% as the March trade deficit was wider than first recorded.

Durable goods orders fell 17.2% in April a bit better than the -19% forecast though the March figure was revised to -16.6% from -14.4%. Orders ex-transport dropped 7.4%, half the -14% prediction though again the March result was adjusted to -1.7% from -0.2%.  Non-defense capital goods orders, the business investment proxy, decreased 5.8%, barely half the -10% forecast. Mach was revised to -1.1% from 0.1%.

Initial jobless claims added 2.1 million filers in the May 22 week bringing the total 40.747 million workers furloughs since the middle of March. 

However, in the first sign that the reopening economy may be pulling people back to work, continuing claims fell 3.86 million to 21.052 million. They had been forecast to rise to 25.75 million from 24.912 million.

Personal spending in April dropped 13.6%, twice the March 6.9% decline. Personal income soared 10.5% far beyond the -6.5% forecast as government transfer payments, largely from the coronavirus relief bill passed by Congress in March shot up 89.6%.

Prices fell more than forecast as well. Core PCE plunged 0.4%, its greatest  single month fall on record* and annual changes dropped to 1% from 1.7% in March, also the largest one month drop on record.

The gain in consumer sentiment in both countries in May, small as it was, probably holds more predictive value than the flailing production and consumption figures for April. 

As the two economies resume normal though somewhat restricted activity consumers will play an important role in rebuilding business confidence shattered by the pandemic and, especially in the United States, the draconian and unnecessarily harsh economic restrictions.

Reuters

Canadian statistics June 1-June 5

FXStreet

US statistics June 1-June 5

FXStreet

USD/CAD technical outlook

Since the Tuesday fall the relative strength index has been at its weakest this year except for the first week in January.  The 21-day average then at 1.3997 was  crossed in the Tuesday move and at 1.3972 it is now well behind the market. The Friday low in USD/CAD 1.3719 just touched the still rising 100-day average which now lends support to the 1.3720 line.  The 200-day average still trails the market at 1.3458. 

The first three support lines are weak the products of the rushed move higher at the beginning of the pandemic panic. 

Resistance:1.3860; 1.3960; 1.4000; 1.4110

Support: 1.3720; 1.3660; 1.3625; 1.3425; 1.3320

USD/CAD sentiment poll

            The retention of the bullish view in the one month and one quarter frame is a relic of the two-month sojourn above the 1.3860 support.  It is unrealistic to expect a return back the old range without a fundamental development supporting the USD/CAD. The bearish cast at the one week limit is barely so as the forecast is just 13 points below the Friday close. The technical analysis portrayed here does not fully credit the break at 1.3860 and the very limited nature of support down to 1.3400.