USD/CAD Forecast May 27-31 – Will BoC, trade tensions shake up Canadian dollar?

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USD/CAD posted slight gains for a second straight week. This week’s highlights are the Bank of Canada rate decision and GDP. Here is an outlook for events this week and an updated technical analysis for USD/CAD.
Canadian data was stronger than expected, helping the Canadian currency hold its own against the strong U.S. dollar. Retail sales and core retail sales both improved in March, with gains of 1.1% and 1.7%, respectively. Both indicators beat the forecasts of 0.8%. As well, wholesale sales jumped to 1.4%, marking an 8-month high.
Trade tensions between the U.S. and China remain high. Last week, the Trump administration announced it was imposing trade sanctions on the Chinese telecom giant Huawei. However, the U.S. Commerce Department then took a step back, saying that it would provide 3-month exemptions to U.S. companies that sell to Huawei. The tussle over Huawei has exacerbated the trade war between the two economic giants, and risk appetite will likely remain soft until the sides resume negotiations.

The Federal Reserve continued to preach patience. The Fed minutes indicated that although members are more optimistic about economic growth, they remain committed to maintaining current rate levels, given that inflation remains low. It should be noted that the policy meeting took place on May 1-2, one week before President Trump announced new tariffs on China, which has significantly escalated trade tensions between the U.S. and China.

The Fed minutes reinforced the message that no rate moves are planned until next year, but the markets aren’t buying it, with many analysts expecting at least one rate cut in 2019. The CME Group has priced in a 36% likelihood of a 25-point basis cut at the September meeting. The possibility of lower U.S. rates makes the greenback less attractive to investors and could dampen sentiment towards the U.S. dollar.

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

https://www.tradingview.com/x/NkLJgA9U/

  1. BoC Rate Decision: Wednesday, 14:00. In April, the Bank of Canada held rates at 1.75% for a fifth straight month. Rate-setters are expected to remain on the sidelines at the May meeting. Still, a dovish rate statement could send the Canadian dollar lower.
  2. Current Account: Thursday, 12:30. The current account deficit ballooned to C$15.5 billion in Q1, up sharply from the deficit of C$10.3 billion in Q4 of 2018. This reading was weaker than the estimate of C$13.4 billion.
  3. GDP: Friday, 12:30. Canada releases GDP reports every month. In February, the economy contracted by 0.1%, its third decline in four months. Will we see an improvement in the March release?
  4. RMPI: Friday, 12:30. The Raw Materials Price Index slowed to 2.8% in March, edging above the forecast of 2.8%. This was the weakest gain in four months.

* All times are GMT

USD/CAD Technical Analysis

Technical lines from top to bottom:

1.3915 was an important resistance line back in February 2016.

1.3757 has held in resistance since May 2017.

1.3660 was the high point for USD/CAD in December.

1.3547 capped USD/CAD in June 2017. 1.3445 (mentioned last week) remained relevant throughout the week. It starts the upcoming week as a weak resistance line.

1.3385 is next. Close by is 1.3350. Lower, 1.3265 was the high point in mid-November. 1.3225 has held in support since early March. 1.3175 was a swing low in late November.

1.3125 is the final support level for now.

I remain bullish on USD/CAD

Trade tensions remain high between U.S. and China, and the suspension of trade talks will only hurt risk appetite. Oil prices plunged 6.0% late in the week, which could weigh on the Canadian dollar.

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About Author

Kenny Fisher - Senior Writer A native of Toronto, Canada, Kenneth worked for seven years in the marketing and trading departments at Bendix, a foreign exchange company in Toronto. Kenneth is also a lawyer, and has extensive experience as an editor and writer.

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