USD/CAD Weekly Forecast: Two main concerns inhibiting the full rise

The USD/CAD made one attempt to join the other major pairs in selling the US Dollar pushing it to 1.3350 on Thursday but the support held and returning worries on the virus spread in the states exacerbated by the unexpected rise in initial jobless claims ended the essay.  

A delay in the next US fiscal stimulus package and China’s retaliatory closing of the American consulate in Chengdu after the US shut China’s Houston consulate added to the risk-off sentiment at week end and the USD/CAD closed at 1.3416.

Improving US employment numbers in May and June, better than expected purchasing managers indexes and a lively gain in new home sales last month have been undermined by unemployment claims which have yet to drop below 1.3 million and rose to 1.416 million in the latest July 17 week.  Behind the concern for the US labor market is the wider worry that rising Covid cases in the South and West will inevitably hamper if not force a retreat in the economic recovery.  

Canadian statistics were supportive of the loonie though retail sales in May were not quite as buoyant as expected recovering 18.7% of April’s 25% loss.  Inflation was more than twice as potent in June as forecast climbing 0.8% on a 0.4% predictions and 0.7% annually on a 0.3% forecast.

The Dow Jones Industrial Average lost 0.68% on Friday, the S&P 500 shed 0.62% and the Nasdaq 0.92%.  Treasury rates were slightly lower on the week with the 10-year closing at 0.587% after opening on Monday at 0.623% and the 2-year yield opening at 0.143% and finishing at 0.149%. 

While the US equity losses on Thursday and Friday came after strong gains in July are likely profit taking, the dollar weakness against the euro, the aussie and kiwi over the past three weeks has the more specific cause of the economic concerns over the pandemic and for the euro the completion of the European Union recovery fund.

USD/CAD outlook

The Canadian economy and its dollar have two main concerns that are inhibiting its full rise in concert with the other majors. 

First its position as the biggest US trading partner makes it susceptible to American economic weakness should the pandemic again force a US shutdown. Second its resource dependent GDP needs a global recovery to prosper, a very uncertain prospect even with the massive spending of the world’s central banks and governments.

West Texas Intermediate has had a very restricted range of $38.54--$42.40 in July, hardly the stuff of a global economic recovery. 

The loonie’s restraints should not prevent its improvement against the dollar in the week ahead, but it will likely move less against it North American colleague than its overseas competitors.

Canada statistics July 20-July 24

Tuesday

Retail sales rose 18.7% in May, less than the 20% forecast following April’s 25% drop. Sales ex-autos climbed 10%, less than half the 22% decline in April.

Wednesday

Inflation added 0.8% in June, twice its forecast following May’s 0.3% increase. On the year it rose 0.7% on a 0.3% prediction and May’s 0.4% gain.

The Bank of Canada core CPI rose 0.4% on the month and 1.1% on the year in June after -0.1% and 0.7% respectively in May.

US statistics July 20-July 24

Wednesday

Existing home sales rose 20.7% in June to a 4.72 million annual rate missing the estimates of 24.5% and 4.78 million. May’s numbers were -9.7% and 3.91 million.

Thursday

Initial jobless claims rose unexpectedly to 1.416 million in the July 17 week. They had been predicted to remain at 1.3 million. Continuing claims dropped to 16.197 million from 17.304 million, 17.067 million had been forecast.

Friday

IHS Markit’s manufacturing PMI rose to 51.5 as expected in July from 49.8 in June. Services PMI climbed to 51 as forecast from 47.9 in June

New home sales rose 13.8% in June far more than the 4% prediction to an annual rate of 776,000. May's revised increase was 19.8% and a rate of 682,000.

Canada statistics July 27-July 31

US statistics July 27-July 31

USD/CAD technical outlook

The relative strength index at 37.34 is at it weakest point since June 10.  The moving averages are unusually mixed with the 200-day the lowest at 1.3516 reinforcing at 1.3515 resistance line.The 21-day at 1.3551 is in the middle of the June 12 to July 20 range and the 100-day is well out of the picture at 1.3842. 

Resistance: 1.3515; 1.3600; 1.3700; 1.3735; 1.3800

Support: 1.3350; 1.3300; 1.3265; 1.3200; 1.3150

USD/CAD sentiment poll

The uniformly bullish view is somewhat at odds with the results of the last few weeks of trading. Though the support at 1.3350 held the bearing pressure from the overall USD weakness is likely to crack that foundation.  The rationale is that there is much less to the recent dollar weakness than meets the eye.  Yes, the Europeans have finally agreed on a recovery fund and markets took that as a reason to break the euro ranges of the past few weeks, but the prospects of the US economy are no worse and probably still a good deal better than that of the EU and once that reality set in the US dollar could well regain status.