USDCAD… US Dollar to gain in the Short-Term. Then it’s time to buy Canada

Intermediate
  • USD will start next week in the ascendency against the CAD
  • This will not last long and be ready to reverse the view as the week drew on
  • The U.S. response to COVID-19 is poor and the economy is under paced
  • The USDCAD pair is used as a vehicle to express a view on oil

The technical picture for the USDCAD pair is muddled with short-term measures saying buy the Dollar whereas the intermediate sentiment suggests the opposite trade should be adopted, Figure 1.

Time Technicals of USDCAD and the 12-Month Chart
Figure 1: Time Technicals of USDCAD and the 12-Month Chart. Source:  www.investing.com

The path of U.S. Dollar weakness since March has led to the spot level crashing through both the 50 and 200-day moving averages without any sign of hesitation.

Indeed, on Friday at the market close the levels were: Spot 1.3260 … 50dma 1.3489 and 200dma 1.3538. Now even the shorter technical measure is lower than the longer, hardly an encouraging signal.

However, the technical sentiment favours short-term buying of the U.S. Dollar over the Canadian as the 14-day Stochastic is showing the USD to be oversold and the MACD at 0.012 is saying the pair is a buy, i.e. go long the U.S. Dollar.

Why is there this divided opinion in the technical sentiment?

Weaker Oil Pressurises Canadian Dollar

The reason for buying the USD is seen as oil prices have been trading in a relatively tight range for the last few weeks, and despite the recent bullish momentum WTI et al have not managed to break out.

The International Energy Agency expects crude oil demand this year to be 8.1 million bpd lower than it was in 2019, a downward demand forecast revision of 140,000 bpd, the authority said in its latest Oil Market Report. The agency cited the very weak aviation industry as a main reason why demand could remain depressed.

Therefore, pressure on the Canadian economy has seen USDCAD return above the 1.3230 area even though U.S. Dollar Index has fallen back against a broad basket of currencies. The U.S. Dollar Index has wallowed around the 93 level and has remained well under the 50dam and 200dam readings since May and June respectively amid continued uncertainty regarding the fate of the new coronavirus aid package in the U.S. 

Stagnant Politics, Mixed Economy

Selling the USD makes sense as the economy in the U.S. is a mixed bag as on the pandemic front no new political talks have been scheduled. There appears little prospect of clarity in the immediate future lawmakers may not stage discussions across the aisle until September due to August recess.

Without any news on the U.S. coronavirus aid package, traders’ focus will likely shift to economic data.

The U.S. reported that Retail Sales increased by 1.2% month-over-month in July well below the consensus of 1.9%. The retail sales looked better without auto sales, growing by 1.9% on a month-over-month basis.

U.S. Industrial Production increased by 3% month-over-month, in line with analyst expectations.

Dollar bulls will argue that the economy is rebounding as the economy added 1.8m jobs in July, more than expected. However, this was well short of the previous month’s 4.8m jobs gain. Not that anyone was surprised given further outbreaks and tighter restrictions.

The real fear is that upcoming U.S. economic reports are disappointing, the U.S. Dollar Index may move below the recent lows at 92.50 which would be bearish for USDCAD.

Figure 2 illustrates the bear channel that USDCAD has occupied for several weeks now and there have, via the gentle rotations within the channel been trading opportunities for the quick-witted player.

The sentiment is that during the first part of Monday trading the USD will catch some upside that could see a small chance of a challenge to the 1.3300 level.

For my money that is not enough of a draw to make me buy the pair. It is just the simple channel rotation again.

On any upside approach to 1.3300, I would sell as  I look to the crude inventories that globally continue to decline. That will prove useful for the CAD and so I would look to sell USDCAD between 1.3290 and 1.3300 and target 1.3179 as my fist objective with 1.3053 as the target thereafter. I would have a stop at 1.3380

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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