USD/CAD Weekly Forecast: Is a higher trend imminent?

  • Dollar Canada trades to the top of its five-month range.
  • WTI gains 5.9% but provides no benefit to the loonie.
  • Canadian April employment at 15,300 trails US job gains.
  • FXStreet Forecast Poll is pessimistic for a breakout.

The USD/CAD closed at 1.2904 on Friday, its highest finish since December 21, adding 1.4% in two sessions and 3.3% in two weeks. Even so the pair has not quite broken its 18-month range which extends back to December 2020 and the long decline from the pandemic panic high of 1.4668 on March 13, 2020. The December 20, 2021 close at 1.2940 and the same day’s trade at 1.2964 are the only markers that remain above the current level.

The plunge in USD/CAD on Wednesday and the recovery on Thursday and Friday were a piece with the market reaction to the Federal Reserve’s policy adjustments.

After Wednesday’s rate announcement, Fed Chairman Jerome Powell said that a 75 basis point hike in June was not likely. This comment relieved equities and to a lesser degree the currency and credit markets of the fear that the bank might  push rates even faster than anticipated. Stocks soared with the Dow gaining nearly 1,000 points, Treasury yields fell and the USD/CAD dropped more than a figure to close at 1.2736.

Thursday everything changed. Equities were crushed with the Dow plunging 1,063.09 points, 3.12% to 32,997.97. The S&P 500 lost 153.30 points, 3.56% and the Nasdaq was decimated losing 647.16 points 4.99% to 12,317.69.

The 10-year Treasury yield rocketed as much as 17 points, to above 3.10% before closing at 3.035%, its first finish above 3.0% since November 2018. Soaring Treasury rates pulled the USD/CAD and the greenback higher in all pairs. 

What had happened? At the very least markets reconsidered Wednesday’s conclusion that the Fed’s 0.5% hike and $47.5 billion start to balance reduction were a sign of a less than eager anti-inflation policy. Chair Powell had also said in his Wednesday news conference that several 0.5% increases are likely and the bond roll-off will rise to up to $95 billion in three months.

Perhaps it was the first quarter Nonfarm Productivity that plummeted 7.5%, far more than the 5.2% forecast, the largest drop in 75 years, combined with a rise in Unit Labor Costs of 11.2%, the biggest jump since 1982.

Maybe it was the knowledge that every recession since 1950 has been fronted by a Fed tightening cycle and only three of 13 prolonged rate increases were not followed by economic slowdowns.  

Finally, with West Texas Intermediate (WTI) well above $100, the Ukraine war and Russian sanctions grinding on, China doubling-down on its zero Covid policy lockdowns, and the Fed trailing the price curve by a wide margin, inflation seems certain to reach double digits shortly. How much longer can the US consumer sustain the steady decline in purchasing power without pulling back on spending?  When and if that happens a recession is all but assured. 

Over the past six-months, Canadian and US Treasury rates have moved in alternating tandem with the Federal Reserve hiking 50 basis points on Wednesday to 1.0% three weeks after the Bank of Canada (BoC) executed the same increase to the same rate. 

The employment recovery from the pandemic lockdowns has also proceeded in much the same fashion with temporary advantage moving from one economy to the other without any permanent gift to either side. Canada’s April Net Employment Change at 15,300 was less than the 55,000 forecast while US Nonfarm Payrolls were 37,000 over consensus estimate which may have added a fillip to Friday’s action. 

Oil has, on occasion, provided a differential particularly in the early March reaction to the Ukrainian invasion which briefly pushed West Texas Intermediate (WTI) over $125.00 a barrel and the USD/CAD as low as 1.2403 in early April. Oil prices rose again this week with WTI adding 5.9%, rising to $109.55 and the top of a descending triangle, without convincing markets that a break higher is imminent.  

The stalemated Ukrainian war and the unwillingness or inability of Europe to enact stricter energy sanctions on Russia, measures which would send oil prices higher, have kept WTI in a $95 to $110 range for six weeks and negated any trend input for the USD/CAD. 

The Fed’s more overt and much more public rhetoric on inflation and the general dollar buoyancy that has brought the Dollar Index to a more than five year high since the last week of April, has helped boost the USD/CAD more than any specific economic or policy item in the relationship. 

Canada’s International Merchandise Trade balance fell for the second month but the descent has come from January’s more than 13-year high. The Ivey Purchasing Managers’ Index for April was a tad less than expected. 

In the US, purchasing managers’ indexes show a decided weakening of sentiment. All April surveys dropped below their March readings, missing forecasts, except the services Prices Paid gauge which rose to an all time high. The services employment index slipped into contraction at 49.5, its second negative in four months. Private firms in the ADP listing hired half as many people in April as they had in March.  Jobless Claims rose to 200,000 in the April 29 week, their highest level in seven weeks.  

The  April US payroll report added 428,000 jobs, slightly more than forecast, and provided markets with a shot of confidence.Unemployment was stable at 3.6% and Average Hourly Earnings rose 5.5%. Equities continued to fall on Friday but moderated much steeper earlier losses. The Dow finished off 0.30%, the S&P 500 down 0.57%, and the Nasdaq shedding 1.4%. Markets remain worried that the endpoint of a Fed tightening campaign will be a US recession. Treasury yields rose. 

USD/CAD outlook

This is the fifth approach to 1.2900 in the last ten months. A break is more likely this time than any of the previous attempts, because, aside from the perfection of hindsight, the Fed’s aggressive anti-inflation policy is coincident with a relatively static oil market. 

The US April Consumer Price Index (CPI), to released on Wednesday, is expected to moderate slightly to 8.4% from 8.5%. It and the Producer Price Index (PPI), which is forecast to rise to 12.2% from 11.2%,  issued on the following day, are the statistical highlights. Any unforeseen strength in either index will play to higher Treasury yields and the dollar.

There are no significant Canadian data releases. 

The Fed’s pursuit of higher interest rates will only be deterred by a faltering US economy. April’s NFP put that concern to rest, for another month at least, opening the way for Treasury yield’s to continue their rise. That freedom and the overall US dollar strength should carry the USD/CAD higher in the weeks ahead. 

Canada statistics May 2–May 6

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US statistics May 2–May 6

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Canada statistics May 9–May 13

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US statistics May 9–May 13

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USD/CAD technical outlook

The MACD (Moving Average Convergence Divergence) and the Relative Strength Index (RSI) remain in strongly positive territory. The narrowing spread between the price and signal lines in the MACD is notice that the USD/CAD is approaching important resistance. The steadily rising  Average True Range (ATR) over the last three weeks and particularly this week are indications that several important resistance levels have been breached and that the USD/CAD is on the cusp of another.

The successive crossings of the 200-day moving average on April 29, the 50-day MA on Tuesday and the 100-day MA on Thursday by the 21-day MA are strong indication of an upward bias in the USD/CAD.