USD/CAD Forecast: Where will the US-China accord take the markets?

• Federal Reserve dovish cast provided modest CAD support.
• US-China trade deal announcement had limited impact but has the most potential.
• Canadian statistics of minor importance next week.

The Canadian dollar found it biggest friend south of the border this week. The Federal Reserve’s unexpected reticence on interest rates and growth at the Wednesday FOMC meeting dropped the USD/CAD almost 70 points to its lowest close at 1.3158.

Aside from that run on the 11^th the range was extremely limited averaging just 42 points a day. From Monday’s open at 1.3254 the US dollar lost ground finishing at 1.3225 on Tuesday, the above mentioned 1.3158 on Wednesday and 1.3182 on Thursday.  The announcement that the US and China had agreed on a trade deal on Friday sparked some volatility as the market tried to assess the details of the agreement and the Dollar Canada touched the weekly  low at  1.3147 but by early afternoon it was trading at the open just under 1.3190.

Fed governors left the US base rate unchanged as universally expected. The quarterly Projection Materials which detail the members economic and rate estimates were also unaltered from the September report with GDP at 2.2% this year and 2.0% next. The fed funds estimate at the end of this year and next dropped to 1.6% from 1.9% to accommodate the reality of a 1.75% upper target.  The base rate moves to 1.9% by the end of 2021, down from 2.1% in September.

In his press conference Chairman Powell kept a positive though more subdued tone about the US economy.  His comment that the Fed would not raise rates until it saw a significant and persistent increase in inflation was unusual and unexpected. The Fed’s attention to inflation since the financial crisis has been almost exclusively rhetorical. Price gains have been below the Fed’s 2% target for most of the past decade and there is no reason to expect this to change. Powell’s notice combined with the lack of GDP improvement in the Fed estimates was the source for the subsequent dollar weakness.

Canadian statistics were minimal on the week.  The leading index from the Organization for Economic Cooperation and Development (OECD) rose to flat in October after spending all of 2018 and 2019 through September below zero.  Housing starts climbed to a 201,300 annualized rate in November up slightly from 200,700 the previous month, though on the low side of its two year range. Building permits fell 1.5% in October after September’s revised 5.9% decline.

Next week brings CPI for November on Wednesday with the annual rate expected to rise to 2.2% from 1.9% in October. The Bank of Canada core rate was 1.9% in October and the trimmed mean was 2.1%. Average weekly earnings Y/Y for October are out on Thursday with September's 4.0% the best measure in eight years.

Crude oil rose modestly on the week with West Texas Intermediate (WTI) opening at $59.25 on Monday and finishing at $59.94 on Friday.  It was the highest close for WTI since September 16^th.

American statistics in the week ahead are limited to secondary items with economic interest but little trading potential. Purchasing managers’ indexes for December in manufacturing and services from the British firm Markit Economics on issued on Monday the 16th, 52.4 and 51.4 are expected. 

Tuesday sees annualized housing starts and building permits, the gauges of the new home construction, 1.34 million and 1.41 million anticipated and industrial product and capacity utilization for November, 0.8% and 77.2% forecast.

The US-China trade deal has the greatest potential for market impact in the coming week. If its terms are seen to be beneficial to the US economy it will bolster the US dollar though less against the Canadian dollar than most other currencies as Canada benefits both as a resource producer and as the United States largest trading partner.

USD/CAD technical outlook

The restrained range this week left the USD/CAD technical apparatus essentially unchanged though the pair is now at the lower end of the three week range rather than near the upper.

The 21, 100 and 200 day moving averages have lost their upward momentum with the shorter averages oscillating lower. The relative strength index is moderately oversold below the 50 neutral line.

The breakout from the upward channel initiated in late October and breached on December 4^th is now conclusive as the USD/CAD and moved further and lower from its initial break.

Major support and resistance levels for the USD/CAD are where they were at the end of last week.

First support line is at 1.3050 with a band to 1.3018, the low in October 2018.   There is another strip at 1.2900-1.2880 the reach of several lows late from August to mid-October 2018. Below that are the lows in October and May 2018, 1.2800-1.2760. Finally there is a support line at 1.2550 the two-year low from April 2018.

Above there is resistance at 1.3330-1.3350 strip the highs for the last six months.  

Between 1.3475 and 1.3500 are a series of levels that marked the top from late April to early June. Though pierced numerous times the Dollar Canada only closed above the upper limit at the very beginning and the very end of the period.  

The next resistance is minor at 1.3525 just above the May high close. 

The December 2018 high at 1.3685 is not a resistance level as it was a product of the extremely limited end-of-year liquidity common each December. 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 become more bearish for next week (58% vs. 50%)  with a drop in the bullish sentiment (9% vs. 25%) consequently there is a 66 point decline in the average forecast to 1.3142 from 1.3208. Medium term sentiment is is markedly less bearish (35% vs. 52%)  and also less bullish (42% vs. 48%), with the balances going to the sideways cast (23% vs. 0%). The average forecast is nearly the same 1.3211 against 1.3221. Long term sentiment has become more bullish (36% vs. 21%)  and less bearish (25% vs 34%) with a fall in the sideways sentiment (25% vs 34%). The average rate is almost unchanged at 1.3168  against 1.3167.

The overview chart  shows a somewhat weaker Dollar Canada largely the product of the Fed's interest rate hesitation. It remains to be seen if the announced US-China trade accord will offer substantial economic benefits for the US, Canadian and global economies. Upon that judegment lies the coming week's trading.