USD/CAD Forecast: NAFTA continues looming over the loonie

• NAFTA has been the central driver once again.
• A relative calm week maintains the focus on trade talks.
• The technical picture is less bearish than it used to be and the FX Poll shows a generally bullish bias.

This was the week: NAFTA overshadows BOC and jobs

After talks broke up on August 31st, they resumed on September 5th. At the time of writing, negotiations continue, and both sides express optimism. Article 19 which focuses on arbitration has been one of the thorniest topics. Canada wants to maintain the current, international dispute settlement mechanism and the US wants it changed. This has been a sticking point also in the original NAFTA deal.

The Bank of Canada left the interest rate unchanged at 1.50% as broadly expected. The BOC maintained its hawkish bias and markets expect a rate hike in October when Governor Stephen Poloz holds a press conference. The Canadain economy is looking good enough for an interest rate increase, but the Ottawa-based institution will not raise rates if NAFTA falls apart. 

BOC Deputy Governor Carolyn Wilkins sent the loonie slightly higher by saying that the BOC considered removing the word "gradual" related to interest rate hikes from the statement. 

Canada's jobs report disappointed with a loss of 51,600 positions. The silver lining came from the composition: full-time positions were gained and many full-time ones were lost. That was not enough to help the Canadian Dollar, that also suffered from a slowdown in wage growth to 2.6% y/y. 

US data was generally positive. Non-Farm Payrolls increased by 201,000, slightly above expectations. More importantly, wages advanced by 0.4% MoM and 2.9% YoY, sending the greenback higher. This increases the chances of a rate hike in December in addition to September. 

A risk-averse atmosphere related to tariffs on China, Emerging Markets, and Brexit sent the dollar higher while optimism on these fronts weighed on the greenback. 

Canadian events: A few housing figures

After a busy week on the economic calendar, the second week of September is light. Housing Starts are released on Tuesday and are expected to bounce back from the lows. The New Housing Price Index (NHPI) disappointed by remaining flat YoY in June and may resume its rises. Canada's housing sector has been like a roller coaster with foreign buying pushing prices higher and regulators trying to curb these increases. 

The dearth of top-tier events leaves the focus on trade relations with the US. Also, oil prices could return as a factor that moves the C$. 

Here is the Canadian calendar for this week.

US events: Retail sales and inflation stand out 

After a week packed with top-tier events, the second week of September begins on a calmer note, allowing some time to digest the data. Things pick up towards the end of the week. The inflation report is due on Thursday and will likely show a drop on Core CPI. The closely-watched figure hit a high of 2.4% in July, but analysts estimate that core prices reached their peak. Barring a disaster, the Fed is set to raise rates in September. 

The second significant event is on Friday with the Retail Sales report. Consumption is critical to the US economy. July saw a healthy increase in all measures. The Retail Sales Control Group is the primary data point. Consumer confidence, later on, Friday will also be of interest. 

Here are the critical American events from the forex calendar: 

USD/CAD Technical Analysis

The USD/CAD broke above the downtrend channel in the past week. This is a bullish sign. It also surpassed the 200-day Simple Moving average on its way up. Momentum is to the upside, and the Relative Strength Index is balanced. 

1.3175 capped the pair during several days in mid-August and remains of importance. 1.3220 held the pair down in July and also in early September, making it a stronger line. Further above, 1.3295 was a high back in mid-July. 1.3350 and 1.3380 both date back to late June.

1.3100 was a resistance line in mid-August and also earlier in the month. 1.3045 supported the pair in mid-August. 1.2960 was a swing low early in the month. Further down, 1.2880 was the low point in August. Even lower, 1.2820 cushioned the pair in May. 

USD/CAD Sentiment

The FXStreet forex poll of experts shows a bullish bias initially, then a neutral one and then bullish once again. The long-term forecast has been pushed higher while no big changes are evident in the near and medium terms. 

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