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USD/CAD Forecast February 17-21 – Canadian Dollar Holds Steady, but Coronavirus Could Mean More Trouble Ahead

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USD/CAD reversed directions last week, as the Canadian dollar finally recorded its first winning week of the year. The upcoming week features consumer inflation and retail sales. Here is an outlook at the highlights and an updated technical analysis for USD/CAD.
In Canada, the focus was on construction data. Housing Starts jumped above the 200-thousand level, with a reading of 213 thousand. This was up from 197 thousand in December and beat the forecast of 200 thousand. As well, Building Permits recovered after three successive declines, posting a gain of 7.4%. This easily beat the estimate of 3.5%.
In the U.S., Federal Reserve Chair Jerome Powell testified before Congress. Powell outlined to the Senate Banking Committee the Fed’s strategy in case of a financial crisis. Powell said that the Fed had two tools to fight a recession – quantitative easing, which involves large purchases of assets, and forward guidance, which means communicating with the markets about the likely future course of interest rate policy. Powell said that he believes that the Fed would use both these tools “aggressively should the need arise to do so”.
Inflation remained at low levels in January. CPI dipped to 0.1%, its lowest level in five months. Core CPI edged up to 0.2%, up from 0.1%. Retail Sales stayed unchanged at 0.3%, matching the forecast. The core reading slipped from 0.7% to 0.3%, also matching the estimate.

USD/CAD daily chart with support and resistance lines on it. Click to enlarge:

  1. Foreign Securities Purchases: Monday, 13:30. In November, the indicator declined by C$1.75 billion, down from a gain C$11.32 billion a month earlier. Analysts are predicting a rebound in December, with an estimate of C$4.82 billion.
  2. Manufacturing Sales: Tuesday, 13:30. This key manufacturing indicator has been struggling, with five declines in the past six months. The November reading came in at -0.6%. A much better reading is expected in December, with a forecast of 0.6%.
  3. CPI: Wednesday, 13:30. CPI should be treated as a market-mover, as it is the primary gauge of consumer inflation. The December release edged up to 0.0%, up from -0.1% a month earlier. The forecast for January stands at 0.3%. Core CPI, which excludes the most volatile items which make up CPI, has posted back-to-back declines. Will we see an improvement in the upcoming release?
  4. ADP Non-Farm Employment Change: Thursday, 13:30. This private-sector indicator helps analysts track the strength of the labor market. The indicator posted an excellent gain in December, showing that the economy created 46.2 thousand jobs, up from 30.9 thousand a month earlier. We now await the January release.
  5. Retail Sales: Friday, 13:30. Retail sales jumped 0.9% in November, its strongest gain since March. Analysts expect a much smaller gain for December, with an estimate of 0.1%. The core reading came in at 0.2% in November, shy of the estimate of 0.5%. The forecast for December is 0.4%.

USD/CAD Technical Analysis

Technical lines from top to bottom:

We start with resistance at 1.3660, which held since December 2018. 1.3550 is next.

1.3420 has remained intact since June 2019.

1.3330 has served in a resistance role since early December.

1.3265 has switched to a support role following gains by USD/CAD last week.

1.3150 is the next support level.

1.3100 (mentioned last week) has some breathing room in support.

1.3048 is protecting the symbolic 1.3000 level.

1.2950 is the final support level for now.

I remain bullish on USD/CAD

The Canadian dollar managed to hold its own last week, but is down 2 percent this year. The coronavirus has dampened risk appetite and sent oil prices lower, so the Canadian currency will likely remain under pressure.

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USD/CAD Technical Analysis, Canadian dollar forecast ► preview of the key events that move the Canadian dollar (C$) during the upcoming week. Here are some general data. Scroll down for the latest USD/CAD outlook

USD/CAD Characteristics

The Canadian dollar, aka “the loonie” (the loon appears on the 1 dollar coin) is a commodity currency. Oil is Canada’s primary exports and fluctuations in the “black gold” move CAD as well. The C$ also moves with also with stocks, as it is considered a “risk currency”. However, CAD  also depends heavily on demand from its No. 1 trading partner and southern neighbor, the USA. Trump’s trade wars hurt CAD. NAFTA renegotiations are not going anywhere fast.

Dollar/CAD tends to react relatively slowly to important economic data from Canada. Retail traders thus have a better level playing field that can jump into a trade even without the most sophisticated algorithmic tools. Even the Canadian jobs report tends to result in a relatively long move.

USD/C$ technical trading is OK: not choppy and tough, but neither fully respecting lines of support and resistance. Higher market volatility and trading volume make it more predictable.

Dollar/CAD Recent Moves

The Bank of Canada raised rates in two consecutive meetings, pushing the currency higher. However, this short cycle came to screeching halt alongside a slowdown in the economy and worries about inflation.

From the post-hike lows at the 1.20 handle, the pair began a correction phase and topped 1.29. However, the rise in oil prices due to some shortages and some profit taking stabilized the loonie. Another factor to watch is the housing situation in Toronto, Vancouver, and Montreal, which is worrying.

Canadian rate hikes, US demand and the price of oil will continue guiding USD/CAD.

Latest weekly Canadian dollar forecast

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