USD/CAD Forecast: The market half-life of a pandemic
|- Canadian dollar improves modestly but remains range-bound.
- March statistics not as bad as expected, April as forecast.
- Support at 1.3880 rejects fourth selling attempt on Wednesday.
- WTI rises but is not yet predicting a rapid economic recovery.
The USD/CAD has been poised for a breakdown for almost two months but so far traders have been unwilling to completely abandon the US dollar’s risk-premium and send the loonie back its pre-pandemic levels of February and March.
For the fourth time in eight weeks the USD/CAD reached the support band of its two month range at 1.3850-1.3880 and failed to make more than a cursory penetration, to 1.3867 on Tuesday and 1.3869 on Wednesday. On both days the close was above the upper boundary, at 1.3944 on Tuesday and 1.3902 on Wednesday. Thursday’s finish at 1.3955 and Friday’s at 1.3999 confirmed the rejection. The retreating tops for the past month give an indication of sentiment and eventual direction as markets wait for a trigger.
Crude oil continued its recovery with West Texas Intermediate adding 12.6% to close at $33.25 on Friday. The Thursday finish at $33.96 was the highest since March 10.
Oil’s modest recovery in the past month is pricing a slow and limited global recovery. Until signs emerge that the return to normality will be faster and stronger higher crude prices will provided only limited support to the Canadian dollar.
The VIX, the Chicago Board Volatility Index (.VIX) closed the week at 28.16 down 6.8% and except for Wednesday’s end at 27.99 its lowest finish since February 26.
USD/CAD outlook
The terrors of the pandemic and its economic fallout are proving to have an extensive half-life. The panic phases of the market reaction to the coronavirus ended two months ago but the potential for a second wave of infections and the yet to emerge economic recovery have kept the US dollar firmly in risk-aversion territory.
Market actions points to an eventual surrender of the US risk premium, likely in a rapid move similar to the one week vault from 1.3400 in early March. Without new signs that the pandemic is regaining potency the USD/CAD will return to its pre-viral levels. The question is whether the decay of time or a trigger will prompt the move lower.
Canadian statistics May 18- May 22
Private payrolls from ADP dropped 226,700 in April its largest decrease by far in the seven years of the record. The March figure of -177,300 was revised down by a factor of 10 to -17,200. No explanation was provide by ADP for the unusually large revision.
Retail sales in March plunged 10% as predicted, their largest monthly decline in the 28 statistical history. The prior records were -4.5% in January 1998, -3.9% in December 2008 and -3.4% in January 2015.
Sales ex-autos, outside of shuttered automobile dealerships, fell only 0.4% in March, much less than the -5% projection.
Wholesales sales in March also dropped less than anticipated -2.2% on a -3.8% consensus estimate.
Overall consumer prices slipped 0.7% in April after falling 0.6% in March. The annual rate fell to -0.2% from 0.9% in March. The Bank of Canada core CPI dropped 0.4% in April from flat in March and the annual rate fell to 1.2% from 1.6%.
Canada statistics May 25 – May 29
Monday
Bank of Canada Governor Stephen Poloz will give the Eric J. Hanson Memorial Lecture at the University of Alberta, title: Monetary Policy in Unknowable Times
Wednesday
Building permits for April, March was -13.2%
Friday
Raw materials price index for April. The index has fallen for three months: March -15.6%; February -4.7%; January -2.3%.
First quarter annualized GDP is forecast to drop 10%, which would be its largest three month decrease in records back to 1961. Fourth quarter GDP was 0.3%. On the month economic activity is expected to drop 0.9% following a flat previous quarter.
Canadian statistics conclusion
Canadian statistics for March were better than forecast, perhaps less bad is a more accurate though displeasing term. April’s numbers were largely as expected.
The accounting for the closure of a large part of the Canadian economy and almost the entire consumer sector has ceased to motivate markets.
Three reasons for the disregard stand out. First the comparison to the United States is mostly moot, leaving neither economy with an advantage. Second the damage has been thoroughly portrayed in the extant statistics and even though pending information such as the April retail sales or first quarter GDP will add dismal details the data has lost the ability to shock. Third, equities, currencies and markets in general are more interested in the speed and shape of the recovery than in the lineaments of the disaster.
It will be the differential between the US and Canada economies in the second half that sets the USD/CAD direction to year end.
US statistics May 18-May 22
Monday
The National Association of Home Builders Index for May, an indicator of future growth in housing, came in at 37, better than the 33 forecast and the April reading of 30 which had been the lowest since June 2012.
Thursday
Initial jobless claims were 2.438 million in the May 15 week, 2.4 million were forecast. Continuing claims were 25.073 million slightly above the 24.765 million and a 2.525 million increase. In the past nine weeks 38.615 million people have claimed unemployment insurance.
Existing home sales plummeted 17.8% in April, not quite as much as the 18.9% prediction and the 4.33 million annualized selling rate retreated to just above the post-crash low of 3.83 million of July 2010.
HIS Markit’s preliminary PMI surveys for May were 36.4 for the composite, up from 27 in April, 39.8 in manufacturing from 36.1 and 36.9 in services from 26.7. All the April reading were the lowest for the approximately 10-year old survey.
US statistics conclusion
The disasters of the past two months have stopped instigating markets. The details of the labor market collapse and the expected economic sinkhole of the second quarter are well established and there is probably little that pending statistics can add in description. New home sales, durable goods orders, personal income and spending for April, initial and continuing jobless claims and the second release of first quarter GDP fall into that old news category.
Of more import for markets is the duration of the downturn and for that it is the forward looking indicators of purchasing managers indexes and consumer confidence that are more telling. The IHS Markit PMIs for May at 39.8 in manufacturing and 36.9 for services were by any normal standard, dismal. But since both were higher than their April scores of 36.1 and 26.7 they may have marked the pandemic bottom.
The preliminary Michigan consumer sentiment reading for May of 73.7, reported on the 15th, also a slight gain from April's 71.8, offers the same view. The Conference Board's May survey due on May 26, expected to rise to 88 from 86.9, presents a similar possibility.
US statistics May 25- May 29
USD/CAD technical outlook
The relative strength index is respecter of price action. The RSI finished at nearly even as last Friday's close at 1.4110 turned into Monday's return to 1.3936 and the back to 1.4000 by this Friday.
The cross of the 21-day average on Monday leaves it just above the week's close at 1.4015 adding a bit to resistance. The 100-day and 200-day averages trail the market and at 1.3670 and 1.3445 will aid support at those levels.
Resistance: 1.4025; 1.4100; 1.4150; 1.4200; 1.4350
Support: 1.3855-1.3880; 1.3780; 1.3425; 1.3325; 1.3215
The uniformly bullish cast reflects the several failures at the 1.3855-1.3880 support band of the past two months. In a technical sense this is correct but in a market still beholden to the fundamental dislocation of the pandemic response, dependence on technical indicators is fraught with risk. When the withdrawal of the US dollar's risk premium becomes inevitable, technical support will present a small impediment.
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