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The Canadian dollar flexed some muscles late in the week, as USD/CAD dropped sharply on Friday. This week’s key events are CPI and GDP. Here is an outlook for the highlights of this week and an updated technical analysis for USD/CAD.

Risk appetite remains high, as the markets remain optimistic that the U.S. and China will reach a trade deal. Months of bruising tit-for-tat tariffs have hurt global growth and led to a slowdown in China. The sides have agreed to extend talks, and there is a strong chance that the U.S. will suspend the March 1 deadline, when punishing tariffs against China were supposed to take effect.

Canadian retail sales reports were soft, but the Canadian dollar managed to shrug off the weak numbers. Retail sales slipped 0.5%, while core retail sales fell 0.1%. Both indicators have posted two consecutive declines, pointing to a slowdown in consumer spending.

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

  1. Corporate Profits: Tuesday, 13:30. Canadian corporations posted a strong increase of 3.9% in profits during Q4, marking a third consecutive expansion. Will the positive trend continue in the fourth quarter?
  2. Inflation: Wednesday, 13:30.   Headline Consumer Price Index (CPI) fell by 0.1% in December, the fourth decline in five months. Core CPI has also pointed downwards, recording two straight declines of 0.2%. However, other measures of Core CPI, the Trimmed, Media, and Common, remained stable around 2%. CPI is expected to rebound in January, with a forecast of 0.2%.
  3. Current Account: Thursday, 13:30. The global trade war and lower oil prices continue to weigh on Canadian exports, and the current account continues to rack up deficits. Still, the deficit in Q3 dropped significantly to C$10.3 billion, beating expectations. However, the deficit is expected to jump to C$14.0 in Q4.
  4. RMPI: Thursday, 13:30. The Raw Materials Price Index rebounded in December, with a gain of 3.8%. The markets are expecting another strong gain in January, with an estimate of 4.1%.
  5. GDP: Friday, 13:30. The economy contracted 0.1% in November, its second decline in three months. Another soft reading is expected in December, with a forecast of 0.0%.
  6. Manufacturing PMI: Friday, 14:30. The indicator continues to post scores above the 50-level, pointing to contraction. Still, the indicator has slowed in the past two readings, raising concerns about the strength of the manufacturing sector.

*All times are GMT

USD/CAD Technical Analysis

1.3175 (mentioned last week) was tested during the week, and USD/CAD finally broke through on Friday, when the pair dropped sharply.

Technical lines from top to bottom:

With the Canadian dollar posting strong gains last week, we start at lower levels:

1.3560 capped USD/CAD in May 2017. Next, 1.3445 was the peak in early December.

1.3385 was the high point seen in May. 1.3350 was a stepping stone on the way and on the way down around the same time.

Lower, 1.3265 was the high point in mid-November. 1.3225 was tested in support in the middle of the week.

1.3175 was a swing low in late November. It is followed by 1.3125 which was also a low point, earlier in the month.

1.2970 is just below the round level of 1.3000. This line was a trough in late October.

1.2915 has held in support since mid-October.

1.2831 is the final support level for now.

I am bearish on USD/CAD

The U.S-China trade war remains the hot topic, and the news has been positive, as the markets are confident that a breakthrough is near. The optimism has boosted the Canadian dollar and the currency’s rally could continue.

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