USD/CAD outlook dims as US data deteriorates further

The US dollar selling stalled in the first half of Thursday’s session even though further evidence of an economic slowdown emerged, following Wednesday’s disappointing macro pointers. Today’s disappointing US macro pointers included jobless claims, industrial production, housing starts and building permits. It looks like traders were put off from selling the dollar further due to a sizeable jump in import prices, as this points to rising inflationary pressures. Nevertheless, the bearish trend for the USD persists and we could see the resumption of the downward pressure now that the major FX pairs have returned to pivotal technical levels. The USD/CAD, for example, was back at the point of origin of Wednesday’s breakdown at 1.3630-1.3650 area. Could we see the Loonie head lower from here? This week’s disappointing US data certainly point to a dimmer USD/CAD outlook.

As I have just touched on technical levels, let’s take a look at the USD/CAD chart first before discussing the macro factors later.

USD/CAD outlook: technical levels and factors to watch

The USD/CAD managed to bounce back from around key 1.3600 support area following Wednesday’s drop. This was formerly a major resistance level until we broke higher in early April. In addition, the bullish trend line that has been in place since December, also provided some support here. But could it resume lower from here?

Source: TradingView.com

The USD/CAD was testing key resistance around 1.3630-1.3650 at the time of writing, a level which was previously support. A drop from this area would not come as surprise to me given how the US dollar has reacted in recent days off similar levels in other pairs.

The USD/CAD bears would still need to see the breakdown of the bullish trend line for confirmation. The technical bias would completely flip to bearish in the event the most recent low at 1.3547 gets taken out, for that would also push rates below the 200-day average.

Meanwhile, the bulls will first need to push rates back above the 1.3630-50 resistance area to tip the short-term balance back in their favour. They will then need to lift rates out of the bear channel (see chart) to regain full control again and completely change the current USD/CAD outlook.

US data dump disappoints but jump in import prices raise inflation concerns

As mentioned, we have just seen the release of a few second-their data, all disappointing expectations.

The latest jobless claims data, which was expected to show a drop in applications to 219K vs. 231K the previous week, came in at 222K, continuing the recent disappointing trend.

The Philly Fed manufacturing index dipped to 4.5 compared to 7.0 expected, down sharply from 15.5 previously.

What’s more, building permits came in at 1.44 million versus expectations of a rise to 1.48 million annual pace, from 1.46m previously.

Meanwhile, industrial production data, was flat compared to +0.1% m/m expected, while manufacturing production fell 0.3% instead of rising 0.1% expected.

However, despite these data misses, the dollar bears were put off by the fact import prices jumped by 0.9% m/m compared to a small rise of 0.2% expected. Rising import costs will only add to inflationary pressures, which could delay the rate cuts.

USD/CAD outlook: Improving Canadian data could delay BOC rate cuts

Meanwhile, sentiment towards the Canadian dollar has improved, even if the Bank of Canada is seen reducing interest rates before the Fed. In April, the BoC maintained rates at 5%. It is awaiting a sustained decrease in core inflation before considering rate reductions, which we think might be on the cards in the upcoming meeting on June 5. The BoC could then gradually reduce the policy rate by 75 basis points to 4.25% by the end of the year, data permitting.

However, we have seen some stronger data from Canada lately. April witnessed a surprisingly robust increase of 90,000 jobs and a steady 4.7% year-on-year wage growth. Additionally, the Canadian government has recently introduced stronger-than-expected stimulus measures. These factors pose an increasing risk that the BOC might postpone rate cuts until later in the year. This could keep the CAD in favour against weaker currencies.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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