- USD/CAD falls 1% to hit a five-week low at 1.2720.
- WTI rises 3.7% and closes at $113.93, an 11-week high.
- The Bank of Canada expects an increase of 0.5% to 1.5% on Wednesday.
- US inflation and Treasury yields go down, PMI, real income goes down.
- FXStreet Forecast Poll anticipates a consolidation above 1.2700.
The two-week-old general reversal in the US dollar took USD/CAD to 1.2726 on Friday, its lowest close since April 22. The 3.7% jump in crude oil played a part, as did the market disfavour that plagued the US dollar for two weeks.
US Treasury rates peaked in the second week of May. The 10-year ended at 3.13% on May 6 and has been falling ever since. It closed at 2.74% on Friday, down 38.7 basis points from that high. Treasury yields had been a direct driver of the dollar’s recent gains against the loonie and other currencies
Core PCE inflation, the Fed’s chosen indicator, rose to 4.9% as expected in April, from 5.2% in March. Overall PCE fell to 6.3% from 6.6%.
Market concerns about the health of the U.S. economy add to fears that Federal Reserve rate hikes, which are expected to reach at least 3% by the end of the year, may slow or stop recovery.
Several other US data points were also weaker than expected. The S&P Global Purchasing Managers Index (PMI) for the services sector came in at 53.5 below expectations for May. Sales of existing homes, which make up 90% of the U.S. real estate market, fell to a 22-month low in April as 30-year mortgage rates jumped to 5.1% at the end of May. On March 3, the national average was 3.76%.
Durable goods orders for April were below expectations despite a strong retail sales performance. Personal spending was stronger than expected, rising 0.9% against a projected 0.7%. Personal income rose 0.4%, just below the 0.5% estimate.
However, when April’s income and spending figures were adjusted for inflation, in a second round from the Bureau of Economic Analysis (BEA), both lost ground.
Real personal expenditure (PCE) rose 0.7% in April, 0.2% less than the unadjusted figure. Real personal disposable income fell flat in April after inflation-linked price gains were suppressed.
Over the period from December to April, real disposable income fell by an average of 0.42% per month. In contrast, the unadjusted personal income figure averaged a positive 0.42% for the same five months.
The loss of real disposable income explains why consumers were again forced to dip into their savings to maintain their spending levels in April.
The Atlanta Fed’s estimate for second quarter GDP fell to 1.8% from 2.4% and revised first quarter growth slipped to -1.5% from -1.4%. It had been expected to rise to -1.3%. The question remains whether the Fed would halt its rate campaign if second-quarter growth were negative, thus meeting the traditional definition of a recession with two consecutive quarters of decline.
Bank of Canada Governor Tiff Macklem is expected to raise the overnight rate by 50 basis points to 1.5% at Wednesday’s meeting. The Federal Reserve is expected to follow suit at its June 15 meeting.
West Texas Intermediate (WTI) rose 3.7% Monday through Friday, closing at $113.93, its highest level since March 8.
The Canadian data was not important; only March retail sales were released. Although the ex-Autos number was stronger than expected, March is old news.
The 2.4% decline in USD/CAD since the close at 1.3044 on May 12 is not so much a fundamental shift in favor of the loonie as an acknowledgment that the benefits of the US dollar have manifested. The spike in US Treasury rates prompted by the Fed’s belated acknowledgment of inflation and its very public determination to rein in prices, was tempered by the reality of a weak economy and a strained consumer. As US households have continued to spend, concerns that inflation, if left unchecked soon, will start to weigh on consumption is one of two scenarios pushing stocks lower. The second is the concern that the very rapid pace of the Fed’s increase will itself dampen economic activity. The slump in home sales to near two-year lows is a signal of danger for rate-sensitive industries.
Despite the steep decline in USD/CAD, it has only reached about half (in a broad definition) of the last 11-month range.
With the exception of the rise in WTI, the other inputs for the USD/CAD level, central bank interest rates, growth and inflation are unlikely to differentiate for two economies as closed as the United States and Canada. The change in perception of US rates has been the main fundamental change over the past two weeks. Reality indicates that the Bank of Canada and the Fed, barring unexpected developments, will alternate rate hikes until the end of the year. There is no permanent advantage on either side of the USD/CAD.
It’s a busy week for US data. On Friday, nonfarm payrolls headlined with an expected fall to 310,000, which would be the lowest in 13 months. The average hourly wage is expected to fall to 5.2% per year, accentuating the loss of purchasing power. Earlier in the week, the Institute for Supply Management’s (ISM) Purchasing Managers’ Indexes (PMIs) in manufacturing and services will be watched for signs of economic weakness. The Conference Board’s Consumer Confidence for May is expected to confirm Michigan’s lower outlook. Markets wary of any sign of US recession, statistical weakness plays against dollar.
For Canada, only the BoC’s rate decision on Wednesday is important.
Expect USD/CAD to drift lower and consolidate between 1.2650 and 1.2750. The caveat to this expectation is oil. A sharp rise in crude prices will drive down the USD/CAD.
Statistics Canada May 23 to May 27
US statistics from May 23 to May 27
Statistics Canada May 30 to June 3
US statistics from May 30 to June 3
USD/CAD Technical Outlook
The downside spread of the MACD (Moving Average Convergence Divergence) price line has widened a bit this week but the sell signal is getting old. Downward movement will be hampered by USD/CAD’s two-month stay between 1.2650 and 1.2750 from late January to early March. The Relative Strength Index (RSI) has only slipped just below neutral despite USD/CAD falling 1% this week and falling 2.4% since May 12.
The Average True Range (ATR) remains high, reflecting the breach of several important levels over the past two weeks. Volatility will likely decrease when USD/CAD encounters the 1.2650-1.2750 range.
The 21-day moving average (MA) tipped lower from Tuesday to Wednesday. The 50 and 100 day MAs frame 1.2700 and form a strong base. The 200-day MA marks the lower end of the range and support at 1.2650-1.2750.
Resistance: 1.2770, 1.2810, 1.2840, 1.2890
Support: 1.2710, 1.2700, 1.2670, 1.2660, 1.2640, 1.2630
Moving averages: 1.2864 over 21 days, 1.2707 over 50 days, 1.2697 over 100 days, 1.2662 over 200 days
FXStreet Forecast Survey
The FXStreet forecast poll is bearish in the immediate outlook but anticipates consolidation just north of 1.2700.