USD/CAD Forecast: Year-end strength may be deceptive

• Canadian dollar heading to six month highs as year ends.
• Sparse statistics this week and next to give little direction.
• US-China trade deal has had limited market impact as yet.

The Canadian dollar improved to its best level in almost two months as the USD/CAD fell as far as 1.3075 in Friday morning trading.  Limited year-end liquidity and general US dollar weakness let the Dollar Canada drift down to its lowest level since October 30^th.

There was one statistical release on Monday of Christmas week, GDP for October came in at -0.1%, missing the forecast for a flat score and down from September’s 0.1% result. 

The loonie’s strength in December that has shrugged off the minor GDP release but also the more important weak retail sales and dismal jobs numbers for November suggests that the improvement this month may be a year-end anomaly. 

With the US economy providing solid growth 2.1% in the third quarter, the job market performing well, American holiday sales reported to be excellent, and both central bank’s on hold the comparison of the two economies will be reassessed by the currency markets in the New Year.  

New Year’s week brings one statistic, Markit Economics' manufacturing purchasing managers’ index on Thursday, January 2^nd.   It is expected to rise slightly to 51.9 in December from 51.4 in November.

The US-China trade deal is waiting to be signed by Presidents Trump and Xi sometime in January though no date has been set.  China has begun to reduce tariffs on a wide range of good and is expected to begin importing large amounts of US agricultural goods as part of the agreement.

US durable goods order were deceptively weak for November in the headline number -2.0%  on a forecast for a 1.5% gain but the loss was almost all in defense department procurement. Orders outside of Pentagon purchases rose 0.8%, far better than the flat prediction. Non-defense capital goods ex-aircraft, the closely watched proxy for business investment rose, 0.1% for the second increase in a row following October’s 1.1% jump.  Initial jobless claims fell to 222,222 after hitting 235,000 and 252,000 in the two prior weeks.

Next week brings US consumer confidence from the Conference Board on Tuesday the 31^st and the purchasing managers’ index for manufacturing from the institute for Supply Management on Friday January 2^nd. The manufacturing sector index has reported contraction for four months and is forecast to remain so in December.

USD/CAD technical outlook

The USD/CAD decline this week had no impact on the pair’s technical structure though the pair is now within striking distance of the 2019 low of 1.3016 from late July.

The 21, 100 and 200 day moving averages have turned lower. The shorter the term the steeper the decline.  The relative strength index is deeper into oversold territory below the 50 neutral line.

One note of caution must be considered here.  Currency movements in December are often not indicative of substantive trends but a product of limited market liquidity. Witness last December’s surge in the USD/CAD of almost three figures in the final two weeks of the year, all of which dissipated in the first three trading days of the New Year.

The down channel formed around the December 4^th breach of the former rising channel remains intact. Friday’s fall in the USD/CAD to 1.3072 brings it to the lower border of the channel. The upper limit is now at 1.3200 and the lower is at 1.3070.

Major support and resistance levels for the USD/CAD are unchanged from last week.

Initial support is a band from 1.3050 to 1.3018. The upper limit coinciding with the lower border of the down channel. There is another band at 1.2900-1.2880 marking the lows late in late August and then again in late September 2018.

Below that is the1.2800 the bottom in October 2018 and 1.2760, the median bottom of a series of lows in May. Finally there is a support line at 1.2550 the low back to February 2018.

Above current  levels there is resistance at 1.3350 the high for the last six months.  

A stretch from 1.3475 to 1.3500 marks a series of highs from late April to early June.  The band was crossed several times at the beginning and end of the period but the USD/CAD closed above the upper 1.3500 limit only at the start and finish of the six week period. The final descent through 1.3475 marked a new lower trend.   

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

The sharp climb of USD/CAD in the last two weeks of December 2018 with a high at 1.3685 was the result of the extremely limited liquidity common at each year end. The three figure move vanished in the first three trading days of 2019.

In the same fashion the brief surge to 1.3800 in June 2017 and the spike to above 1.4600 in January 2016 are irrelevant for current trading.

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

USD/CAD sentiment poll

Near term sentiment has become more bearish (73% vs 63%), less bullish (18% vs 26%) and more decisive (9% vs 11%). The forecast has declined 50 points to 1.3068 from 1.3137. 

The one month outlook is slightly more bullish (65% vs 60%), fueled by a larger drop in bearish feeling (13% vs 35%) and a jump in sideways sentiment (22% vs 5%). The forecast is little changed at 1.3175 vs 1.3183.   

The quarter outlook is far more bullish (57% vs 37%), slightly less bearish (32% vs 37%) and far more certain of the outcome (11% vs 26%).  Oddly the forecast is lower at 1.3120 vs 1.3133. 

In summary though the USD/CAD may fall somewhat in the near term our analysts expect growing strength in the new Year.