USD/CAD Weekly Forecast: Asleep but for how long?

The USD/CAD remained in consolidation this week after breaking its pandemic down channel on September 8 but conditions have not so far established an active reversal.

With a start to finish range of just 26 points, the USD/CAD remained below 1.3270 resistance as traders await either better economic information from the US, as opposed to improved Fed projections, or a sure sign that the recovery has faltered.

The USD/CAD has stalled within its 1.3040-1.3350 range from July 2019 to February 2020.  The 11% gain in the Canadian dollar from March 18 to September 1 has provided ample profits for the taking and any run higher can be expected to be bolstered by stop buying but for the moment such a move is awaiting a catalyst.  

West Texas Intermediate, the North American crude standard, recovered from last week’s decline that was itself a product of the inability to break back into the range above $44. Here also traders are waiting for concrete indications that the global economic rebound from the COVID-19 shutdown is gathering strength.

WTI

For the Canadian economy, which is about 20% tied to US GDP, a rising oil price may only have limited impact on the loonie as it would mean that its southern neighbor had finally begun a strong recovery.

Canadian statistics summary September 14-September 18

Canadian statistics were generally good with the rebound from the March-April closures completed and activity resuming normal parameters. 

Manufacturing sales for July rose 7%, a bit under the 8.7% prediction but receipts have added 41.6% in three months, more than recovering the 38.5% fall in the shutdown months.

CPI in August was -0.1% on a 0.1% forecast and the annual figure was 0.1% the same as July, missing the 0.4% estimate by a wide margin and up from May’s -0.4%.   Core CPI was flat in August on a -0.2% expectation and annual prices rose 0.8% after 0.7% in July.

Retail sales in July were under forecast at 0.6% on 1% estimate. Sales have more than recovered the 34.9% pandemic decline rising 42% in May, June and July. The August preliminary increase of 1.1% can be considered a resumption of normal activity.

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US statistics summary September 14-September 18

American economic data was generally weaker than expected inhibiting the USD/CAD.

Industrial production in August rose 0.4% less than half the 1% forecast, though July was revised to 3.5% from 3%.

Retail sales increased 0.6% in August, missing the 1% expectation and the July figure was revised to 0.9% from 1.2%.  The GDP component control group fell 0.1%, much worse than the 0.5% forecast and its July result dropped to 0.9% from 1.4%.

The Fed funds upper target was unchanged at 0.25% after the FOMC’s Wednesday meeting.

As noted above, the extension of current rates to the end of 2023 in the Projection Materials and Chairman Powell’s wary assessment of the US economy continued the Fed’s overtly dovish policy stance. However, the improvement of US GDP  this year from -6.5% to -3.7%, the reduction of unemployment to -7.6% from-9.3% and the increase in core PCE prices to 1.5% from 1% militated against an overly negative view of the US economy.

Initial Jobless Claims for the week of September 11 were 860,000 down from 893,000 prior. Continuing Jobless Claims were 12.628 million, below the 13 million forecast and almost one million less than the previous week’s 13.544 million.  The stubbornly high jobless figures are one of the chief cautionary notes for the US recovery.

Consumer sentiment in the Michigan Survey was better than anticipated at 78.9 in September, 75 had been predicted and it is now at its post-crisis high, though well below the February reading of 101.  

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USD/CAD outlook

The inconclusive break of the pandemic downtrend presents an undecided view forward in the USD/CAD. There is as yet not enough evidence that the US economy has recovered from the lockdown debacle to generate a strong return in the dollar. The Fed’s evident caution reinforces that wariness.

That a reversal of a five-month trend would be blocked by the relatively weak resistance at 1.3270 is another indication of market uncertainty. The USD/CAD has returned to its pre-pandemic range which is perhaps not surprising after the egregious but essentially artificial excitation of the virus.

A major point for the US economy remains the labor market, which continues to shed nearly one million jobs a week despite the strong return of payroll positions in the NFP report. Were these figures claim to drop, the chances for a concerted gain in the USD/CAD would rise substantially. 

The USD/CAD reached above 1.3600 in December 2018 and traded above 1.3400 for much of the second quarter of 2019. Those ranges would be the natural destination for any move higher. Profit-taking purchases would likely begin north of 1.3350 where the USD/CAD bounced in early June.

FC

Technical support and resistance are relatively balanced below and above with the long period spent between 1.3000 and 1.3400 augmented by the recent drop and recovery. The area above 1.3370 is replete with trading interest from the post-panic decline.

For the moment, the USD/CAD is waiting for a catalyst but with profit-taking buying lurking in the wings, it would not take much improvement in US statistics to send the probes higher. 

Though without obvious expression, upward bias lies beneath the current state of the USD/CAD.

Canada statistics September 21-September 25

A negligible week in Canadian statistics with just new home prices for interest. 

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US statistics September 21-September 25

Existing home sales are 90% of the US housing market and they have rebounded sharply from the COVID-19 closures. The July annualized rate of 5.86 million was the best since the declining days of the housing bubble in mid-2007. The surge of sales in June and July confirms that large swaths of the US economy are healthy.

Markit's purchasing managers' indexes for September, manufacturing, services and composite, are expected to be largely unchanged but a better than expected result could provide modest support for the dollar. 

Chairman Powell will testify before the House on Wednesday at the Select Subcommittee on the Coronavirus Crisis on the Fed's pandemic response. While no new information is expected Mr. Powell's comments always have a potential market impact. 

Mr. Powell and Treasury Secretary Mnuchin will testify before the Senate Banking Committee on the topic of coronavirus relief on Thursday with the same market stipulation. Initial jobless claims have receded in immediate effect but their continuing high level makes an unexpected drop would possibly provide a boost to the dollar.  

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USD/CAD technical outlook

The Relative Strength Index (RSI) at 51.09 is just above neutral which, despite the recent move higher, is another instance of market uncertainty. Support lines are tight below the current level but peter out quickly below 1.3000. Resistance is more plentiful, which is not surprising given the past five months and more evenly spaced. The 21-day moving average at 1.3147 reinforces the first support line at 1.3140. The 100-day average at 1.3490 and the 200-day average at 1.3520 bracket and augment the 1.3500 resistance line.

With the exit from the down channel sustained technical bias is neutral. The resistance at 1.3270 is weak and the multiple lines above this level are balanced by the potential for stop-loss buying as the USD/CAD moves higher. 

Resistance: 1.3270; 1.3350; 1.3425; 1.3500; 1.3630

Support: 1.3140; 1.3085; 1.3040; 1.2970

USD/CAD forecast poll

Our contributors anticipate another selling attempt this week and a failure with the concluding rate to be just slightly lower on Friday. The close below 1.3270 has changed attitudes for the one month and one-quarter views.  From strongly bullish in both frames last week, 76% with a 1.3425 forecast in the one month and 68% with a 1.3463 estimate in the one quarter, both forecasts have dropped beneath the 1.3270 resistance line.  It seems clear that our experts see the 1.3270 line as a pivot for near term trading.  Even though it is unexpected by our contributing analysts, a close beyond the 1.3270 line might trigger a run into the buying stops that are almost certain to lie above. 

USD/CAD forecast poll