USD/CAD Weekly Forecast: Peering over the edge of the rut?

• BOC rate decision and outlook offers nothing new.
• US CPI at 5% in May provides surprise but no movement.
• WTI finishes week at nearly three-year high.
• FOMC meeting and projections may provide policy signs.
• FXStreet Forecast Poll turns positive through one quarter.

The USD/CAD has been trading in an exaggerated one figure rut for more than a month from, 1.2035 to 1.2160 and back. Friday’s nearly 100-point move brought the pair to the top of that range, just as the drop on June 2 touched the bottom. There has been no trend since the plunge on May 6 disposed of support at 1.2265.  

Rising oil prices, which support the Canadian economy and dollar, are poised against the strength of the US expansion and inflation. In normal times, 9.3% annual GDP and a 5% yearly CPI would lead to a Federal Reserve rate hike in short order.   

Markets correctly assume that the next Fed move will be a reduction in its bond purchase program and higher US Treasury rates. Even though the timing for the policy change is indistinct, traders will not bet against that adjustment by selling the USD/CAD.  

Wednesday’s Federal Reserve Open Market Committee (FOMC) meeting may bring some clarity to Fed policy. If it does, it will not be because the FOMC statement or Chair Jerome Powell elucidate details and dates but because the new Projection Materials will put down in figures Fed thinking and economic assumptions. The first set of projections in March had PCE inflation at 2.4% and the core rate at 2.2% at the end of this year. The US expansion was forecast at 6.5% and unemployment at 4.5%. Those numbers were a substantial improvement from the prior estimates in December. 

The new figures will undoubtedly rise again – the question is how much? Inflation is probably the most crucial.  After the rapid increase this year, the Consumer Price Index (CPI) average for the past 12 months is 1.92%. Market perception of Fed policy will turn on this PCE projection regardless of Chair’s Powell's own reticence. 

Canada’s economic prospects and currency have been supported by rising energy prices. The oil business provides 11% of Canada's gross domestic product. West Texas Intermediate (WTI) has scored a new three-year high in seven of the last ten trading sessions. Friday’s close at $70.58 was the highest since October 16, 2018.  

The Bank of Canada’s (BOC) rate decision and statement on Wednesday were uneventful as was Governor Lane’s speech on Thursday.  April’s 25% reduction in the amount of BOC bond purchases (C$3 million from C$4 million) is unlikely to be repeated until the Fed begins its own reduction. The weak performance of the Canadian labor market in April and May ensures a static rate policy for several months at least. 

In the US, May CPI at 5%, the highest rate in 13 years, evinced little currency movement as the Fed’s rate policy is fixed. The Federal Reserve considers the current inflation trajectory transitory and will maintain its bond buying program at $120 billion per month.  

The Job Openings and Turnover Survey (JOLTS) for April listed 9.3 million unfilled positions, the most on record, underlying the peculiarity of the weak hiring in April and May.  Michigan Consumer Sentiment was a bit better in June than forecast but not of a degree to derange current consumption assumptions. 

USD/CAD outlook

The limited range of the USD/CAD over the past month illustrates the dilemma for traders.  American Treasury rates are going higher. When they will rise depends partially on the US labor market and partially on inflation. The first provides permission and the second motivation. This week’s FOMC meeting is not going to change policy, though Chair Jerome Powell may loosen his strict no compliments policy on the US economy.

His and the governors’ conundrum is that the more honest they become about the rapidly expanding and inflationary US economy, the more impetus they give to bond market hawks eager to take Treasury rates higher. The Fed is not ready to sanction what could easily turn into a bond market rout. Treasury rates trade inversely to prices. 

The Fed will remain discrete this week. If US statistics continue to show proof of accelerating growth, expect that reluctance to diminish as the summer wears on. 

Canada’s inflation rate for May will be uneventful since the BOC has already reduced its bond purchases. 

Oil prices are the opposition of US rate expectations. There is space for WTI to move appreciably above $70, but that is contingent on an effective global recovery.  

For the moment, the competition between US Treasury rates and oil prices is in balance, giving the USD/CAD no reason to leave its early summer range.   

Friday’s 75 point run higher should give the USD/CAD a slight initial bias higher this week, especially since the Fed risk is for a more positive assessment on the US economy. 

Canada statistics June–7June 11

FXStreet

US statistics June 7–June 11

Canada June 14–June 18

Housing Starts for May will indicate whether the strong home construction market has continued through the spring lockdowns. Consumer prices could rise more than expected, like the US, but unlike the Fed, the BOC will feel no pressure to counter inflation. 

FXStreet

US statistics June 14–June 18

The Federal Reserve meeting on Tuesday and Wednesday dominates next week. No change is expected in policy or the bond program, but the economic projections will be of utmost interest. Markets are looking for any clue to Fed rate timing. Inflation will be the central focus. The March version had PCE inflation at 2.4% and core at 2.2% at year end. The higher that projection moves, the closer a bond taper becomes. The Treasury market, US rates and the dollar will react if the forecast warrants.

FXStreet

USD/CAD technical outlook

Tuesday's cross of the 21-day moving average (MA) along with an upward bias in the three momentum indicators below gives the USD/CAD a mild case of float starting the week.

The area above Friday's close at 1.2155 is bereft of most resistance as it was traversed in one day, May 6, leaving few reference points. The USD/CAD failure to penetrate beneath 1.2040 despite the strong gains in WTI is another indicator that a rebound may be in the offing. It would not take many positive syllabels about the US economy from Federal Reserve Chair Jerome Powell to give the USD/CAD the excuse for a rise. Nor, however, would it take much for Mr. Powell to deny such a move. Markets will be restrained until the Fed's outlook on the US economy is known. 

Support lines have the ascendance this week, being more closely spaced and timely than resistance.  

The mild bias in the USD/CAD is higher. 

Resistance: 1.2165, 1.2265, 1.2315, 1.2400

Support: 1.2135, 1.2100, 1.2070, 1.2035

FXStreet Forecast Poll

It is not quite a reversal, but the positive sentiment in the FXStreet Forecast Poll could be reinforced by the Federal Reserve this week.