USD/CAD Forecast: Welcome to the recovery blues

• USD/CAD returns to pre-pandemic start line of early March
• US dollar surrenders all of its crisis gains following break at 1.3860 on May 26
• Canadian May employment change far better than expected, mirroring US NFP report
• WTI rises to just below the early March break on hoped for demand recovery
• OPEC + agrees to one-month extension of output cuts
• Bank of Canada keeps overnight rate at 0.25% as expected

In the end it was a foregone conclusion. Once the US dollar’s risk-premium support at 1.3860 was broken on May 26, and with the greenback in decline in every major pair there was no place to go but down.  As we noted last week, "There is little support between the current level in the USD/CAD and the pandemic panic launch point at 1.3400."  The remaining support at 1.3720 went on Monday and by Friday’s close at 1.3422 the USD/CAD was exactly at the finish of March 6 the day before the pandemic panic began.

The Bank of Canada under its new Governor Tiff Macklem kept the overnight rate at 0.25% where it has been since March 27 even as policy makers noted that that financial conditions and the economy are starting to recover from the lockdowns imposed to combat the viral outbreak.

Canadian employment reversed in May with the economy adding 289,600 jobs after shedding 2 million in April and upending the forecast for a 500,000 decline.  The improvement was wholly unexpected as in the United States where the non-farm payrolls jumped by 2.5 million instead of falling by 9 million as predicted.

West Texas Intermediate (WTI, CLc1) gained 12.3% on the week and 8.7% on Friday prompted by the clear signs of economic improvement in the US and Canadian jobs reports and the announcement that OPEC+ would meet on Saturday to officially extend its record 9.7 million  barrels a day production cut through July.  The cuts had been due to taper to 7.7 million barrels from July to December.

The meeting took place as planned on Saturday and the group agreed to the extension and a stricter approach to cheating by members. Mexico refused to go along with the new schedule. Energy Minister Ricio Nahle said "There are other countries that extended their cuts to July, in this case we said no, we'll stick to the agreement that we signed in April."

The still unsettled question of  crowd transmission of the coronavirus  and the efficacy of the lockdowns is undergoing a very public experiment.  Either the vast crowds that have gathered in the US and Europe over the past two weeks will foment a new wave of infections and perhaps fatalities or they will not.

If the second case is true then governments that imposed strangulation on their economies will be relegated to claiming that they were acting on the best knowledge available at the time.  If the first case is accurate political leaders will have to justify why they are willing to risk infection and death for politics purposes but not for economic life. 

USD/CAD outlook

As Canada, the United States and Europe reopen their economies the pace of economic recovery will quicken. 

The massive street protests in the United States and Europe will speed the process. Whatever the success or failure of social distancing policies in stemming the coronavirus, it will become almost impossible for governments to enforce business closure orders while permitting enormous crowds to gather for political purposes.

In early March the USD/CAD was at the high point of its ten-month range and except for the year-end run to 1.3660 in the last  two weeks of December 2018 and six weeks around May 15, 2019, the pair was at the high side of a two-and-a-half trend from 1.2100 in September 2017.

The immediate question for USD/CAD traders is with the US dollar risk-premium deleted and both central banks firmly fixed to a 0.25% base rate where will the market turn for differential analysis.

Technically the area between1.3400 and 1.3000 is heavily populated with the almost two years’ worth of trading (June 2018-March 2020) and without clear fundamental direction the USD/CAD will be hard pressed to inaugurate a trend lower after deserting the panic of the last three months.

It may take a few weeks and providing there are no viral surges ahead, but currency markets will return to economic analysis. There is quite literally no place else to go.  

A quicker US than Canadian recovery will push US rates higher despite the Fed's commitment to the zero bound until the economy has cleared the pandemic damage. 

Canadian statistics June 1-June 5

Monday

Markit manufacturing PMI for May confirmed the payroll statistics rising to 40.6 from 33 in April.

Wednesday

The BOC like the Federal Reserve is expected to keep tis base rate unchanged at 0.25% through the end of the year.  New support programs are unlikely unless there is a severe deterioration in their economies and the market will be limited to noting the assessment of progress.

Thursday

Exports declined more than imports in April, C$-9.41 billion vs. C$-5.46 billion widening the trade deficit from C$ 1.53 billion to C$-3.25 billion.

Friday

The May change in employment added 289,600 jobs instead of eliminated 500,000 and though the unemployment rate rose to 13.7% from 13%, it was considerably better than the 15% forecast.

The Ivey purchasing managers’ index for May rose to 42.1 from 23.6 the lowest in the survey's 21 year history.

FXStreet

US statistics June 1-June 5

Monday

Purchasing managers’ indexes for May in manufacturing improved on their April numbers.  The overall index rose to 43.1 from 41.5, the new orders gauge climbed to 31.8 from 27.1 and the employment PMI increased to 32.1 from 27.5.  Construction spending in April fell 2.9%, less than half the -6.5% prediction.

Tuesday

Total vehicle sales jumped to 12.2 in May from 11.4 in April.

Wednesday

ADP employment change for May at -2.76 million on a -9 million forecast and -19.557 million loss in April was a surprise and predictor for Friday’s NFP.  The May services PMI figures were, as their manufacturing counterparts a slight turn up from April. The overall index rose to 45.4 from 41.8, the new orders index jumped to 41.9 from 32.9 in April and the employment index edged to 31.8 from 30.

Thursday

Initial jobless claims added 1.877 million to the rolls down from the prior week’s 2.126 million.  Continuing claims rose from 20.838 million to 21.487 million as the average weekly increase drops.

Friday

Non-farm payrolls expanded 2.509 million workers vastly different than the -8 million forecast and last week’s record -20.687 decline. The unemployment rate dropped to 13.3%, reversing direction on the 19.8% projection and last month’s 14.7% 82 year record. The underemployment rate slipped to 21.2% from 22.8%.  The average hourly earnings increase on the year fell to 6.7% from 8% in April as lower paid workers returned to their jobs. Average hourly earnings on the month fell 1%% after rising 4.7% in April.  The labor force participation rate climbed to 60.8% from 60.2%.

Canada US statistics summary June 1-June 5

The US and Canadian economies can be expected to improve at similar rates as the pandemic panic recedes and rational life resumes and this week's statistics did not favor either party.    

Over the next few weeks two factors lean toward the US and the dollar in the reporting race.  The US has a much more comprehensive and frequent statistical regime.  If the economic information continues to improve there will a lot more of its from south of the border and it will impact the USD/CAD more often. Second, better US data will drive yields in the Treasury market higher as they climb the USD/CAD may follow in their wake. 

Canadian statistics June 8-12

US statistics June 8-June 12

USD/CAD technical outlook

The relative strength index dipped to oversold and with the technical impediments to a further rapid drop multiplied its mean reversion signal is strong.   The entire pandemic response has played havoc with the signals of the moving averages.  The move lower in the past two weeks has crossed all three in succession the final 200-day average on Friday.  Except for the 200 at 1.3470 with resistance they are currently out of the technical picture.

Resistance: 1.3510; 1.3580; 1.3720; 1.3800; 1.3860

Support: 1.3420; 1.3360; 1.3315; 1.3275; 1.3230; 1.3170; 1.3135; 1.3080

USD/CAD sentiment poll

The one week view shows the expiring negative momentum in the USD/CAD. It forecast is just below current levels and the rebound in the one month and one quarter views is both normal mean reversion and awareness that  with pandemic motivation absent economic recovery speed may favor the US and the dollar.