USD/CAD Weekly Forecast: Support holds at the one-year line

• USD/CAD reverses at 1.3330 support, finishes week unchanged.
• Canadian GDP expands 4.5% m/m in May, better than anticipated, after -11.5% in April.
• US pandemic statistics may presage an improvement in the greenback.

Canada’s improving economy failed to lift the loonie beyond its one year limit despite a strong general move against the US currency throughout most of the week.

The USD/CAD began on Monday at 1.3417 and closed on Friday at 1.3412. In every other major pair except the New Zealand dollar which closed flat, the greenback lost ground though a good portion of the week’s advance was lost in a profit-taking reversal on Friday.

For ten months from June 2019 until this March 1.3330 marked the top for USD/CAD.  Approached many times in August, September, October and December last year and then this February it was not conclusively broken until the early March market panic. It has held as support since.

The lack of improvement in oil prices, West Texas Intermediate has been listless between $38.50 and $42.50  for three weeks and it inability to return to its range prior to the march panic has also inhibited futher Canadian strength. 

Reuters

Canadian statistics summary July 27-July 31

Canadian statistics were thin this week but provided some notice that the economy has moved on from the April trough.

The raw material price index, which measures the prices for material paid by Canadian manufacturers, rose 7.5% in June after May’s 16.4% gain leaving it at two-thirds of the combined 36% drop in January through April.

Industrial product prices rose 0.4% in June following May’s 1.2% increase.  The selling prices for major commodities dropped 4% from January through April.

Building permits jumped 6.2% in June added to May’s 21.6% gain, the rebound is at 75% of the February to April 37.2% decline.

Canada’s GDP expanded 4.5% in May better than the 3.5% forecast, making good about one-quarter of the 11.7% and 7.5% decrease in April and March.

US statistics summary July 27-July 31

Statistical evidence for the recovery from the March and April closures accumulated but markets have already moved to the concern, evident in the currencies over the past two weeks, that the US will be unable to sustain the momentum and might slip into further decline, especially in jobs.

Durable goods rose 7.3% in June adding to May’s 15.1% burst though they are still lacking the combined 35% drop in March and April when the economy was shuttered.  Goods ex-transport climbed 3.3% in June and 3.6% in May, as the overall they are still down on the 10.1% loss in the prior two months.

Non-defense capital goods ex-aircraft, the business investment proxy, rose 3.3% in June better than the 2.3% forecast, but May was reduced to 1.6% from 2.3%, leaving them recovered 4.9%, a bit over half the 7.9% drop in March and April.

The FOMC meeting on Wednesday produced no new policy or analytical information.  Yield curve control, the targeting of specific long-term rates was not mentioned.  Chairman Powell was realistic about the challenges facing the economy and noted again that the course of the virus defines the success of the recovery.

Second quarter GDP set its expected record at -32.9% annualized, a trifle less than the -34.1% forecast. The US is now officially in recession after -5% in Q1. The Atlanta Fed’s GDPNow model posited 11.9% in the third quarter in its first estimate.

Initial jobless claims rose to 1.434 million for the second straight weekly gain dramatizing the worry that the higher virus case counts in many states will inhibit the recovery. The low for claims was 1.307 in the week of July 10.  Continuing claims jumped to 17.018 million on July 17 from 16.15 million.

Personal spending in June, properly personal consumption expenditures (PCE) rose 5.6%, 5.5% had been forecast. After the May increase of 8.5% the combined gain of 14.1% remains below the shutdown loss of 19.5%.

Core PCE prices, the Fed’s preferred inflation gauge, climbed 0.9% in June following May’s 1% increase. It is down from 1.8% in February.

USD/CAD outlook

The US Dollar slide over the past two weeks to Friday was predicated on the worsening Covid spread in several large states and the presumed impact on the economic recovery.

 Initial jobless claims, the most closely watch statistic since its explosion in March heralded the economic onslaught of the Pandemic shutdowns, has risen for two straight weeks. Though the amount of the increases were small the reversal suggested that the strong employment recovery of May and June had stalled. 

With US payrolls down 22.16 million in March and April, the May and June return of 7.499 million to work, just over one-third, was unlikely to be sufficient unless augmented in the third quarter, to fully  power an economic rebound.  The estimates for July payrolls to be released on August 7 are just 1.36 million less than one-third of June’s 4.8 million addition.

The Canadian economy has returned more people to work, 41% of the March and April losses have been made good, (March -1.010 million, April -1.993 million, May 0.289 million, June 0.952 million).  The July forecast is 0.653 million which would bring the rehired percentage to 63%. 

For the US to reach that level almost 6.5 million people would need to be added to payrolls in July.

However, in the most recent US Covid data, the seven-day moving average of new cases in Arizona is down 40% over the past three weeks, Florida 19% over two weeks and California lower though not consistently.  This suggests that the peak of the infections may be past.

Economic activity in the US seems to have leveled off or increased slightly. The Richmond Fed's manufacturing index jumped to 10 in July from flat in June and is up from -53 in April.  The New York Fed's weekly index improved in late July as did as did most regional Fed activity indexes on the month. 

If US statistics for the pandemic and the economy continue to improve Thursday’s reversal in the USD/CAD, which spread to the other majors on Friday, may predict a change in the US dollar’s fortunes in the week ahead.  It would also help the dollar's cause if Congress agreed on a new economic support package. 

Canada statistics July 27-July 31

FXStreet

US statistics July 27-July 31

FXStreet

Canada Statistics August 3-August 7

FXStreet

US statistics August 3-August 7

FXStreet

USD/CAD technical outlook

The Friday recovery in USD/CAD brought the relative strength index from  it seven-week low on Monday of 33.49  to 41.80. Moving averages remain well-distributed with the 21-day at 1.3495, the 200-day at 1.3524 and the 100-day at 1.3824. 

The USD/CAD is situated between two well established ranges, from last July to February below and from June to the present above.  The extensive trading during both periods left numerous support and resistance lines.

Resistance:1.3470; 1.3540; 1.3620; 1.3700; 1.3780

Support: 1.3330; 1.3275; 1.3225; 1.3140; 1.3075; 1.3030

USD/CAD sentiment poll

Sentiment is universally bullish as it was last week. The forecasts are all on the same big figure suggesting that the conviction is  that the selling has been overdone rather than that the fundamental case for a stronger USD is convincing.  Markets are likley to wait for the July payroll reports from the US and Canada on Friday before finding a verdict.