- China rate cut temporarily boosts risk sentiment on Friday.
- USD/CAD drops to two-week low at 1.2777, closes at 1.2839.
- Canadian CPI and core higher than forecast in May.
- FXStreet Forecast Poll is neutral out to one month.
Improving global risk sentiment helped the Canadian dollar to a winning week for the first time in two months with the USD//CAD falling from 1.2924 to 1.2840.
The People's Bank of China (PBoC) made a surprise cut to its 5-year interest rate (Loan Prime Rate) in an effort to support the economy battered by lockdowns from Beijing’s zero-Covid policy. Canadian consumer prices ran hotter than expected in April, 6.8% on the year vs the 6.7% forecast and 5.7% on a 5.4% estimate for the core index. The Bank of Canada (BoC) meets in 12 days on June 1 and is expected to raise the cash rate another 50 basis points to 1.5%.
Federal Reserve Chair Jerome Powell and other US bank officials continued to sound harsh notes against inflation this week, but the dollar’s long ascent took a general breather as the greenback lost ground in all major pairs. There is a good deal of market doubt that the Fed could continue to raise rates if a recession strikes the US economy.
Recession fears in the US pummeled Treasury yields with the 10-year losing 14 basis points to 2.788%. Equities managed a last minute reprieve on Friday but still finished lower for the eighth week in a row. The S&P 500 briefly touched bear market territory, normally defined as down 20% from, in this case, January’s record high.
Oil assisted the loonie’s gain as West Texas Intermediate (WTI) added 1.3% to $109.83. Except for Monday’s close at $111.59, it was the best finish for WTI since March 25.
In the US, Retail Sales for April were better-than-expected and gave a temporary boost to stocks. Building Permits dropped sharply in April. Existing Home Sales, 90% of the US market, fell to a 22-month low. Home purchases have been axed by rising mortgage rates which reached a 13-year high at 5.25% this week.
The USD/CAD stayed below 1.2900 which has marked the upper side of its nearly year-long range. The early May break to a high of 1.3076 has proven to be false with USD/CAD lasting just one session above 1.3000 and one above 1.2900.
Slipping US Treasury rates have undermined the USD/CAD and will continue to do so if they continue to come off. The Fed’’s tightening campaign has a 96% expectancy for a total 100 basis point hike through the June 27 meeting, so a wholesale decline in Treasury rates is unlikely.
The Atlanta Fed’s latest GDP Now estimate for the second quarter is 2.4% and has gone up since early May.
Next week, Canadian Retail Sales will provide insight for the domestic economy but will not move the USD/CAD.
In the US, Durable Goods orders for April should repeat the Retail Sales information. First quarter GDP receives its first revision, any surprise here could impact markets. Large adjustments to GDP are rare but they do happen. Personal Spending for April will be interesting as the Bureau of Economic Analysis authors a real spending series with the figures corrected for inflation. It is not widely covered but will be far more telling for the state of the consumer and the economy than the nominal numbers of retail sales or personal spending..
The USD/CAD remains subject to the general market risk appetite, commodity prices and changes in perceived Federal Reserve policy, especially for US economic developments that might inhibit the bank’s rate policy.
The USD/CAD outlook is neutral and well-contained within recent ranges.
Canada statistics May 16–May 20
US statistics May 16–May 20
Canada statistics May 23–May 27
US statistics May 23–May 27
USD/CAD technical outlook
The MACD (Moving Average Convergence Divergence) on Monday does not seem to be a signal for a general trend but a product of the steep drops on Friday and Monday and particularly the rapid loss of 1.3000 and 1.2900. The divergence bears watching. The Relative Strength Index (RSI) has fallen since the high trade in USD/CAD on May 12 and is back to neutral. The Average True Range (ATR) remains near its highest level since last October but as with the indicators above, that is the result of the brief foray above 1.2900, rather than a promise of equal volatility ahead.
Resistance: 1.2865, 1.2880, 1.2925, 1.2960
Support: 1.2825, 1.2800, 1.2775, 1.2750
Moving Averages: 21-day 1.2864, 50-day 1.2699, 100-day 1.2694, 200-day 1.2660
FXStreet Forecast Poll
The FXStreet Forecast Poll is neutral out to one month as the support beneath the market will retard any movement lower and the rapid failure above will peclude another attempt.
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