The Canadian dollar continued its January rally, as USD/CAD declined close to 1% last week. There are no major Canadian events until Friday, with the release of CPI. This means that U.S. indicators will have a magnified effect on the direction of USD/CAD. Here is an outlook for the highlights of this week and an updated technical analysis for USD/CAD.
The Federal Reserve has made a sharp U-turn, sending a much more dovish message out to the markets than we saw in December. Federal Reserve Chair Powell is now saying that the Fed will exercise patience and is in no rush to raise rates. As well, the minutes from the December policy meeting were dovish about future rate hikes, and this sent the greenback broadly lower last week.
The Canadian dollar has also benefited from stronger risk appetite. Notably, there is renewed optimism that the global trade war could ease, after talks between U.S. and Chinese officials were extended by a day, and there were reports that the sides made minor progress.
There were no surprises from the Bank of Canada, which held the benchmark rate at 1.75%. Lower oil prices and the ongoing global trade war were important considerations for the decision to hold rates. Still, BoC Governor Poloz insisted on Wednesday that the bank would continue raising rates in 2019.
USD/CAD daily chart with support and resistance lines on it. Click to enlarge:
- ADP Nonfarm Employment Change: Thursday, 13:30. This indicator, which has been in use for just over a year, is a useful gauge of the strength of the Canadian labor market. According to the ADP report, the economy created 39.1 thousand jobs in November, rebounding from a sharp decline a month earlier. Will the positive trend continue in December?
- CPI: Friday, 13:30. This key consumer inflation indicator should be treated as a market-mover. Inflation is weak, with CPI posting declines in three of the past four months. Another decline is expected for December, with an estimate of -0.3%.
*All times are GMT
USD/CAD Technical Analysis
USD/CAD continued to drop last week, but managed to post slight gains on Thursday and Friday. The line of 1.3175 (mentioned last week) held firm in support.
Technical lines from top to bottom:
We begin with resistance at 1.3662. This marks a high point at the start of January, when the Canadian dollar started the current rally.
1.3560 capped $/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, as the pair posted strong losses before recovering late in 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.
Below 1.3000 we find the late-October trough of 1.2970.
1.2880 was a double-bottom in September and in August.
I am neutral on USD/CAD
Risk appetite appears strong, which is bullish for the Canadian dollar. However, CPI is expected to post a decline, which could dampen investor enthusiasm for the Canadian dollar.
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