USD/CAD Forecast: Will the loonie lick its wounds? A NAFTA deal is a necessity

• The USD/CAD extended its gains, mostly on the strength of the US Dollar.
• Canadian GDP is the highlight of the new week as NAFTA talks reach crunch time. 
• The technical picture for the USD/CAD is now more balanced.

Higher US yields dominate, oil stalls, NAFTA 

The Canadian Dollar was on the back foot but did not suffer the same falls as in the previous week.

Higher US bond yields: The primary story in financial markets was the rise of US yields to multi-year highs. Most notably, the 10-year yield crossed the 3% mark. This kept the US Dollar bid throughout the week, and the Canadian Dollar could not weather this storm. Headline Durable Goods Orders came out beyond expectations and set the scene for a beat on US GDP, which came out at 2.3% annualized: below the 2.9% level in Q4 2017 but quite good for the usually weak initial quarter of the year. 

Poloz remains cautious: Bank of Canada Governor Stephen Poloz testified and repeated the messages from the rate decision. All in all, the BOC remains cautiously optimistic, but the slowdown in inflation may also slow down the pace of rate hikes.

Oil prices stalled: After several weeks of advances, prices of the black gold that Canada exports stabilized and consolidated the previous gains as inventory data showed a surprising build for a change. The path to $70 in WTI Crude Oil is a slippery one.

NAFTA talks continue: The US, Canada, and Mexico are working hard in Washington to conclude a free trade agreement with the Mexican Presidential election looming. Once again, we heard some optimistic comments, but the sensitive topic of automobiles has not been fully resolved. The loonie has mostly priced in a deal, but nothing is agreed until everything is agreed.

Canadian events: GDP and NAFTA

The week begins with secondary inflation figures: the IPPI and the RMPI and the main dish is on Tuesday. Canada's GDP probably bounced in February after a disappointing squeeze of 0.1% in January. The nation is unique in publishing growth figures on a monthly basis. The BOC already expected a slow growth rate in the first quarter: 1.3% on an annualized basis. 

Tuesday sees Canada's trade balance publication. Another deficit is likely in March after the C$2.69 billion one in February. Trade figures with the US are of political importance as NAFTA talks continue. 

The week concludes with the Ivey PMI, which has been at high levels in March, reflecting robust growth. The indicator is quite volatile, but another robust outcome is likely. 

The fate of NAFTA remains central to the Canadian Dollar. All three sides are making an effort to reach an agreement, at least in principle, as soon as possible. The looming Mexican Presidential Elections and the potential victory of Lopez Obrador, a populist, serve as motivation to announce an agreement.

Such an announcement would boost the C$. However, after the optimism expressed in recent weeks, the rise will likely be limited. A failure to make a statement, or worse off, a breakup of the talks, which is currently off the charts, would send the loonie crashing. 

Here are the upcoming events that will move the Canadian dollar as they appear on the forex calendar:

US events: NFP buildup and a Fed decision

The turn of the month is busy in the US. Monday sees the Core PCE release, the preferred measure of inflation by the Fed. It is expected to rise closer to the 2% target. 

On Tuesday, the ISM MAnufacturing PMI serves as the first hint towards Friday's Non-Farm Payrolls report, and another high score is on the cards, reflecting the positive momentum of the US economy.

Another hint towards the NFP awaits on Wednesday with the ADP Non-Farm Payrolls, which is projected to moderate to the averages of 200,000. More importantly, the Federal Reserve makes its decision. This time, there is no press conference nor new forecasts. Nevertheless, the recent rise in inflation may encourage Jerome Powell and his colleagues to upgrade the upbeat tone in the statement, thus cementing the June hike which is priced in by markets.

On Thursday, Unit Labor Costs provide further insight about wage inflation, and the ISM Non-Manufacturing PMI serves as another hint towards Friday's big event. Also here, the positive momentum is expected to continue.

The Non-Farm Payrolls report on Friday carries expectations for a return to around 200,000 jobs gained in April after a disappointing rise of 103,000 positions in March. Yet the focus remains on the wages. While the monthly increase is expected to moderate to 0.2% after 0.3% beforehand, the year over year figure is predicted to hold its ground at 2.7%. Any rise toward 3% will be a boon for the greenback while a slide to the previous levels of around 2.5% may weigh.

Here are the critical American events from the economic calendar

USD/CAD Technical Analysis

The recent stabilization in the USD/CAD has taken the USD/CAD out of oversold territory. The RSI points higher and remains below overbought conditions. Momentum is somewhat lacking, but the pair is trading above the 50-day Simple Moving Average. 

Looking up, C$1.2890 is the high point in late April. 1.2950 was a high point in early April. The round number of 1.3000 is next, and 1.3050 was a line of support when the pair traded on high ground.

Looking down, 1.2800 is a round number and also where the 50-day Simple Moving Average meets the chart. 1.2760 and 1.2680 were swing highs early in the year. 

 

Where next for USD/CAD?

A deal on NAFTA is close and could give the C$ a small boost. However, this is mostly priced in. The strength of the US Dollar should be enough to counter this. All in all, the pair has some room to rise, but a NAFTA deal can curb the gains.

 The FXStreet Forecast Poll shows a sideways move in the near term and bullish in the medium term. This is quite similar to the opinions expressed here.