USD/CAD Weekly Forecast: Selling exhaustion

• USD/CAD drops to seven month low at 1.3192 on Thursday.
• US retail sales spur rebound from support at 1.3190.
• Better than expected Canadian June manufacturing sales fail to aid loonie.

The USD/Cad tried and failed to break its long-term support on Thursday but the weak recovery and general USD selling augurs for another attempt in the near future.

Thursday’s move was the first trade below 1.3200 in seven months and came on a 30 minute 24 point run from 1.3216 to 1.3192. It was the lowest the USD/CAD has been since January 30.  The reversal was immediate reaching a high of 1.3226 in the following half hour and closing that period at 1.3210.   Action the rest of the day and on Friday trended higher to the close at 1.3260.

Given the six week down channel in the USD/CAD and the decline of the US dollar against all the majors over the past month an attempt on support was inevitable.

The USD weakness has been based on the suspected economic effect of the second wave of Covid cases which began in a number of large US states in June.

From the July data so far, jobless claims, non-farm payrolls and retail sales, it appears the slowdown was minimal if at all.  With a similar rise in positive diagnoses occurring in many European countries, Australia and New Zealand, the economic concern may soon be shifting back to the other side of the dollar pairs. 

Canadian manufacturing sales on Friday rose 20.4% in June better than the 16.4% forecast and the upwardly revised 11.4% May numbers. Market impact was negligible as the almost two month old figures provide no new information.

In the US initial jobless claims fell to 0.963 million in the first week of August, the lowest of the Covid era. Retail sales rose 1.2% in July for the third positive month in a row.  This brought the margin of retail sales recovery over the pandemic collapse to 4.89% overall or 1.63% monthly.  In a normal economy that would be considered a sign of an excellent consumer sector.

The control group of retail sales rose 1.4% on the month, beating the 0.8% forecast.  Sales in June were revised higher in all three groups with the headline number adding 0.9% to 8.4%, the control group 0.4% to 6% and the ex-autos number 1% to 8.3%.

Treasury yields rose on the US data with the 10-year adding 14 points on the week to 0.709% and the two-year gaining 2 points to 0.149%. 

WTI remained range bound, closing at $42.01 with little demand encouragement from the world’s industrial economies.

The United Arab Emirate’s agreement to recognize Israel and open diplomatic relations with Jerusalem brokered by the Trump administration, especially if followed by other Sunni states, may have removed some of the threat to the oil supply, but until usage revives prices and resource currencies face a deficit of positive energy.

USD/CAD outlook

While the USD/CAD has shared in the dollar slippage of the past month it had failed to break to new post-pandemic lows until Friday. 

Though all other major pairs saw new dollar lows over the past two weeks, none were retained as US data has become stronger and Covid’s second wave began washing ashore in Europe, Australasia and elsewhere even as it seems to be receding in the US.

With the focus returning to the viral economic impact, the euro, aussie and kiwi may see the same negative speculation in the next few weeks as the dollar did.  The outlook for the USD/CAD in the week ahead depends on the promise of July’s US and Canadian statistics.  In the States we have housing starts and existing home sales and in Canada retail sales and ADP employment.

Canada statistics August 10-August 14

Tuesday

Housing starts for July rose to 245,600 on the year, beating the 210,000 forecast for the highest level since November 2017.  June's rate was 211,700

Friday

Manufacturing sales climbed 20.7% in June almost doubling May revised 11.6% increase. The forecast was 16.4%. Sales had fallen 24.4% in March and April

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US statistics August 10-August 14

Tuesday

Producer prices rose 0.6% in July, twice the forecast, after falling 0.2% in June.  Annual prices fell 0.4% in July, less than the -0.7% and Junes 0.8% drop. Core PPI rose 0.5% on a 0.1% forecast and 0.3% drop in June. Annual core PPI rose 0.3% on a flat forecast and 0.1% gain in June.

Wednesday

CPI rose 0.6% in July, the same as in June and twice the 0.3% predictions. Annual prices gained 1%, on a 0.8% estimate and a 0.6% rise in June.

Thursday

Initial jobless claims in for August 7 rose 0.963 million far less than the 1.120 prediction and the prior week’s 1.191 million. Continuing claims fell to 15.486 million in the July 31 week, far less than the 15.898 million forecast and 16.09 million the previous week.

Friday

Retail sales rose 1.2% in July missing the 1.9% forecast. The June figure was revised to 8.4% from 7.5%. Sales ex-autos climbed 1.9% on a 1.3% estimate. June’s result was revised to 8.3% from 7.3%.  The control group rose 1.4%, on an 0.8% projection. The June figure was adjusted to 6% from 5.6%.

Industrial production added 3% in July as in June. The forecast was flat. Capacity utilization rose to 70.6%, ahead of the 70.3% forecast and a large move from June’s 68.5% score.

Non-farm productivity rose 7.3% in the second quarter almost 5 times the 1.5% forecast following the 0.3% drop in the first quarter. It was the largest gain in 11 years.

Michigan consumer sentiment’s preliminary reading edged to 72.8 in August from 72.5 in July. The forecast was 72.

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Canada statistics August 17-August 21

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US statistics August 17-August 21

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USD/CAD technical outlook

Even with the modest recovery on Thursday and Friday USD/CAD remains offered on the relative strength index. The USD/CAD has not been above 50 on the index since July 14. 

The moving averages are all above the market with the 200-day at 1.3532 backing resistance at 1.3525, the 21-day untethered at 1.3370 and the 100-day at 1.3725 behind the 1.3700 resistance line.

Resistance: 1.3320; 1.3400; 1.3450; 1.3525; 1.3640; 1.3700

Support: 1.3230; 1.3190; 1.3150; 1.3080; 1.3040; 1.3000

USD/CAD sentiment poll

The one week view anticipates another attempt on support with another failure to foster a breakdown in the pair.  One month and one quarter views remain positive recognizing the potential rebound in the US economy, higher US Treasury rates and the drag on Canada's resource based activity from weak energy prices.