USDCAD - Outlook for the week ahead
The USDCAD gradually retreated over the course of last week, interrupted by occasional bouts of volatility taking direction almost exclusively from US data releases. Contradictory US Housing reports provided a little chop to USDCAD trading undermining the positive effect from a much stronger than expected Canadian Retail Sales report on Tuesday. The week's biggest data release was Thursday's US Durable Goods report which was 4.2 percent, well above consensus. A strong reading had been expected due to gains in the transportation component which is what occurred so it failed to provide much USD support. A soft jobless claims report put more downward pressure on USDCAD
The week ahead
This will be an interesting week with a mix of month end flows, central bank rate decisions and the US non-farm payrolls report all on tap. Month end flows (repatriation, rebalancing, etc) can cause hiccups in FX markets but this being a non-quarter end month and in the middle of summer suggests that the effect will be minimal. The main Canadian data release, May GDP, (forecast 0.1 percent month-on-month) could give the loonie a boost especially if posts an outsized jump, like last week's retail sales number. As much as Canadians want to believe that domestic data releases are a major driving force in USDCAD direction, the reality is that the loonie is dancing to Fed chairman Ben Bernanke's tunes.
And Ben sings on Wednesday. The US Federal Reserve announces its interest rate decision followed by a press conference. It may be a leap of faith, but after the kerfuffle in June, it may be a logical conclusion that there will be no change in the tone or message. If so, the Friday payroll numbers will be more scrutinised than usual, especially since the Fed is on record as saying that tapering is data dependent. Prior to the Fed announcement will be the release of US Q2 GDP (forecast 1.2 percent year-on-year). There is expected to be a ton of benchmark revisions which will likely add a layer of confusion to the assessment of the data.
Across the pond, the ECB rate announcement and press conference is also on Thursday as is the Bank of England decision. Both central banks are expected to maintain the status quo.
Friday is the big day, mainly because Bernanke explicitly tied tapering to the jobless rate. At the moment, the consensus seems to be in the 184,000 area. If the data is better than expected, the USD will rise and if it is below expectations, the dollar should fall although weaker data merely delays the inevitable.
The short term USDCAD technicals are bearish while trading below 1.0320 looking for a break below the US dollar support zone, currently between 1.0240-60. The US dollar has been in a downtrend since peaking at 1.0605 which comes into play at 1.0320. In addition, the US dollar has broken through 1.0304 support, arising from the 38.2 percent FIbonacci retracement of the 2013 range ( 0.9820-1.0606).
There is strong US dollar support in the 1.0240-60 area stemming from double bottoms and the 100-day moving average.
Source: Saxo bank: Daily USDCAD chart with moving average
Source Saxo Bank: USDCAD Daily with Fibo
The USDCAD could see a bit of chop on Monday and Tuesday around the 11:00 am fix (4:00 pm WMR Reuters Fix) as positions get rebalanced but otherwise will struggle to find direction until Friday's payroll data. Even this month's FOMC is likely to be understated as the Fed tries to avoid the carnage it caused last month. The USDCAD is likely to trade between 1.0240-1.032 until Friday. If non-farm payrolls exceeds a 210,000 gain, the USDCAD should rise on anticipation of an early start to tapering. A sub 150,000 print could lead to dollar losses, although the losses should be short-lived as tapering is inevitable.