October 22, 2020

Fundamental and technical agreement on a rising US dollar

  • USD/CAD gains 1.4% on the week, highest close since August 3
  • Pandemic down channel from March broken with Monday surge
  • USD/CAD participates in general US dollar recovery in the major pairs
  • FXStreet Forecast Poll predicts consolidation not strong gains in USC/CAD

The US dollar returned to the offensive this week with a successful assault on the six-month old descending channel that began in the COVID-19 panic in March.

 Monday’s open at 1.3204 coincided with the upper border of the channel and after a brief dip to 1.3171 the pair moved to and through the limit, paused at 1.3240 and then continued straight to 1.3300 and the Monday close at 1.3307.  After Tuesday’s consolidation and close at 1.3304 the efforts in the three final sessions were almost identical with closes of 1.3387 on Wednesday and 1.3362 on Thursday.  Friday’s end at 1.3388 brought the USD/CAD to its highest conclusion since August 3.

The dollar improved in all of the major pairs with the USD/CAD gaining 1.4%, the USDJPY 1%, the EUR/USD losing 1.8% and the AUD/USD fading 3.6%.  

Rising COVID-19 cases in Europe the UK and to a lesser degree in some US state prompted the risk-aversion revival of the dollar and a small gain in the safety status of the yen. The USD/JPY was the weakest of the rising dollar based pairs.   

The prospects of renewed lockdowns in the UK and perhaps on the continent, though not in Sweden which practiced a far less restrictive approach to the pandemic, have the potential to inflict serious  pain.  With European economies barely recovered from the original closures, the rancorous Brexit negotiations pending and the ECB at maximum rate support, the options for reviving growth are limited.  The currency markets are beginning to notice the current and future disparities with the US and the rest of the globe.  

The Canadian dollar suffered in the general return to the greenback and also in the particular weakness of West Texas Intermediate (WTI) which fell from the prior week’s high of $41.49  to close at $40.25 on Friday. 

USD/CAD outlook

Agreement between the technical and fundamental outlooks for the USD/CAD is likely to produce further gains in the week ahead. 

The descending channel had held sway for six months after the panic high of 1.4537 in the USD/CAD on March 19.  The gradual filching of the dollar premium took until the end of July and the mid-August drop to levels below those of the onset of the pandemic was a logical continuation of the trend even though unsupported by any fundamental economic difference between the US and Canada.

The USD/CAD has reached the first Fibonacci retracement at 23.6% of the March to September overall decline but that is unlikely to be the finish. In historical terms at least 50% return moves are common and that line at 1.3778 and the 61.8% at 1.3951 should be considered targets for the next few months.

The immediate goal will be the resistance line at 1.3460 which marks the lower limit of the range from the middle of June until the third week of September.

Canada and US statistics summary September 21-September 25

It was a thin week in Canadian statistics. The New Housing Price Index rose 2.1% on the year to August  following July’s 1.7% gain. It was the highest annual increase since 2.4% in March 2018. On the month prices were 0.5% higher on a 0.3% forecast and July’s 0.4% increase.  It was the highest month since May 2017.

In the US Fed Chairman Powell and Treasury Secretary Mnuchin testified in Congress three times, calling for continued government support for the economy and a new stimulus bill.  It is unclear whether the Democrats and Republicans, in the grip of a presidential campaign, will be able to bring themselves to compromise.

August durable goods order reflected the fading economic support coming in at 0.4% on a 1.5% forecast, though the July number was revised to 11.7% from 11.2%.  Non-defense capital goods, the business investment proxy surprised at 1.8%, more than tripling its 0.5% estimate and its July score was revised to 2.5% from 1.9%.

Markit’s preliminary September PMIs were as advertised, 53.5 in manufacturing on a 53.2 forecast and 53.1 in August.  The service sector registered 54.6, under its 54.7 prediction and August’s 55.

Jobless claims disappointed with 870,000 filings in the latest week, over the 843,000 prediction and 866,000 in the previous week.

The layoff of nearly one million workers each week is the main negative note for the US economy, showing that some areas of the economy continue to contract.

Durable goods were less than a third of forecast in August but the disappointment was mitigated by the 0.5% upward revision to July and by the much stronger Non-defense Capital Goods orders, 1.8% on a 0.5% forecast and the 0.6% addition to the July result bringing it to 2.5%.  .  

Canada statistics September 21-September 25

US statistics September 21-September 25

Canada and US statistics summary September 28-October 2

This is a second sparse week in Canada. Raw material prices and industrial product prices for August are issued on Wednesday. Material prices have not recovered from the January to April collapse of 35.8%, they are only 26.9% higher from May to July. Industrial product prices are 1.1% lower from March through July. 

Monthly GDP is expected to rise 8.7% in July from 6.5% in June. If the forecast is accurate the March and April drop of 19.2% will have been more than equaled by the May through July gain of 20%. 

The Markit September Manufacturing PMIs expected to drop to 54.1 from 55.1.

None of these statistics are likely to have an appreciable impact, even the GDP figures retrograde.

In the US the major news comes from the labor market with the September non-farm payrolls and unemployment data on Friday. Payrolls are expected to drop to 875,000 from 1.371 million in August and the unemployment rate to be largely unchanged at 8.3% from 8.4%. 

The recovery of the job market is the main focus for the US economy and the translation is straight forward, better statistics support the dollar and equities.  Credit markets are less impacted with the Fed’s long-term rate hold.  

Initial jobless claims are an important secondary data point as the continuing high level of filings undermine confidence in the recovery and tilt the NFP risk lower.

The presidential debate between Donald Trump and Joe Biden on Tuesday September 29 is not strictly an economic event but any unexpected development or cancellation would roil markets though the specific dollar direction would depend on the circumstances.

Other notable statistics will be the Conference Board Consumer Confidence figures for September, the final revision of second quarter GDP, Personal Consumption Expenditures and prices for August, ISM manufacturing figures for September and the revision for September’s Michigan Consumer Sentiment. 

None of these statistics are normally sufficient to provoke markets but the September ISM and the two consumer reading have the most potential. 

Canada statistics September 28-October 2

US statistics September 28-October 2

USD/CAD technical outlook

The three week rise in the USD/CAD has pushed the Relative Strength Index to 63.18 but the level should not be considered overbought.  The 21-day average at 1.3202 is joined to the support line at that level. The 100-day is part of the 1.3460 resistance and the 200-day at 1.3528 can be included in the 1.3510 resistance. 

The break of the descending channel is confirmed as the market continued to move higher.  The Fibonacci series first line at 1.3386 is the Friday close and now support with the 38.2% line at 1.3643 the first goal and the 50% line at 1.3778 after that. 

Resistance: 1.3460; 1.3510; 1.3620

Support: 1/3340; 1.3300; 1.3200

USD/CAD Forecast Poll

Our expert view is decidedly bearish with even the one-week forecast barely above the Friday close at 1.3388. Though the one-month and the one-quarter predictions at 1.3295 and 1.3273 would not entail re-entry into the down channel they certainly belie the steep ascent from the break which ran  straight to the 23.6 Fibonacci line. 

In this case I have to part company from the consensus. I think the USD/CAD moves higher with the Fibonacci lines as the primary targets. 

 

 

 

 

 

 

 

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