USD/CAD Weekly Forecast May 8-12
Toronto-Canada (May 7) USD/CAD posted an impressive streak is it rallied for ten consecutive sessions prior to turning lower at the end of the week. Friday’s decline did not only serve to snap the bullish run in the pair but the single day drop erased gains from the early week. As a result, USD/CAD has printed a bearish shooting star on a weekly chart and a bearish engulfing candle on a daily chart.
The candlestick patterns hints of a turn lower, however, there are major technical developments driving oil prices, suggesting declines may be short-lived.
Last week, the pair closed at its highest level on a weekly basis in over a year. The sustained break above resistance at 1.3588, which held the pair lower on two attempts in the fourth quarter of 2016, has signaled a bullish continuation.
A technical break in oil prices is also hinting at further gains for the currency pair. WTI crude oil prices broke below a nine-month channel in the past week, setting a bearish tone. The lower line of the channel also carried confluence with the 200-period daily moving average, emphasizing the technical break. The breach of support materialized on Tuesday and followed a steady decline until Friday.
There was a sharp recovery in oil prices on Friday which resulted in a bullish hammer print on a daily chart. The recovery drove USD/CAD lower as the inverse correlation between the two products has strengthened as of late.
Correlations with the US dollar index (DXY) have weakened during the same time period as the index traded in a range for nine days prior to breaking lower on Friday.
The Federal Reserve met this past week and released an optimistic statement. The central bank did not appear concerned over the miss in first quarter GDP or regarding the recent decline in the PCE price index. The Fed was also positive regarding the labor market, pointing out that the unemployment rate declined in March.
The jobs report on Friday indicating an even further decline in US unemployment to 4.4% April from 4.5% in the prior month, marking the lowest level in a decade. The headline increase was above expectations and average hourly earning fell in line with expectations, although there was a downward revision for the prior month.
The Canadian jobs report was mixed. Employment change for April fell short of expectations which was the first time over the past nine readings. The unemployment rate dropped to an eight-year low of 6.5%.
Positioning in the loonie net short position increased for the seventh consecutive week. Non-commercials were reported to hold the currency net short by $3.48 billion in the week to May 2nd, up $338 million from the prior week. The current net long is the largest since February 2016.
High impacting economic releases pertaining to the pair in the upcoming week are from the United States and include CPI and retails sales on Friday, and PPI on Thursday. The annual CPI data will be the highlight as it will carry important implications for a June rate hike. The CME group shows the odds for a rate increase at the next meeting at 78.5%.
In addition to the economic calendar, fluctuations in oil prices will remain important to the exchange rate. Both instruments have shown an important technical break recently and both corrected on Friday resulting in a reversal daily candle.
Important support in USD/CAD falls at the previous breakout point of 1.3588. The level capped gains in November and December of 2016. Further support for the pair falls at a declining trendline that was breached in late April which resides around 1.3525.
Source: EconomicCalendar
