USDCAD Outlook: Week of 3/9

by on March 8, 2014 7:43 pm BST

The Canadian dollar seen a little love during the beginning of last week, and the USDCAD seen a break through parity after a US dollar sell-off was triggered by comments from the European Central Bank (ECB) President Mario Draghi ignited forex market fury. However, the endorphins began to wear off after positive non-farms payroll data out of the United States overshadowed Canadian labor data that fell short in February.

The Canadian labor force was reduced more than expected, which is reigniting speculation that the Bank of Canada (BoE) will reduce the benchmark rate from one percent to bolster economic growth. Employment was cut by 7K jobs, but the unemployment rate remained at seven percent. Economists were looking for an average gain of 15K jobs in February.

Last month’s positive data put the BoC in neutral, and the Canadian dollar benefited. Greg Anderson, head of global FX strategy at the Bank of Montreal, said “it doesn’t juxtapose well against the U.S. number, and it probably gives the Bank of Canada full justification to be very soft with rhetoric now for another three months.”

The Canadian trade deficit continued to narrow, coming in to $177 million CAD in January on falling imports, dropping 1.6 percent. Autos held the largest decline, falling 5.9 percent. Exports saw a minor gain of .02 percent.

Statistics Canada is looking for the weak economic climate to continue as growth expansion is estimated to fall from 2.9 percent to two percent in 2014. Hedge funds and large speculators increased their net-shorts of the Canadian dollar against the greenback. According to the recent trader’s commitment data from the Commodity Futures Trading Commission (CFTC), net-shorts increased to 61,096 contracts on March 4 compared to the 58,591 contracts a week earlier.

USDCAD seen support just under parity at 1.0966, after consistently declining from price resistance at 1.1160. This has been confirmed as a strong support level (until broken) as price action has seen similar price spikes from this level on January 22 and February 19.

Price action could see minor resistance underneath 1.1100 before retesting confirmed resistance at 1.1160. Ever since breaking through 1.1000, USDCAD has been trading between these two key support and resistance levels that form a channel.

1D Chart of USDCAD

1D Chart of USDCAD

Traders are likely to see the pair range bound until a catalyst presents itself to cause a breakout in either direction. If USDCAD breaks down, traders can expect the pair to trend lower to the 72 EMA , currently at 1.0889. The 50 percent retracement of the yearly low-to-high could pose the next level of significant support at 1.0761.

The current high represents a multi-year high on the pair, so a five-year chart show a better perspective of key price levels. Upon a break and close above the current high, the USDCAD could see 1.1380 in the coming weeks. The growth disparity between the US and Canada will likely continue to fuel this objective. Both countries are seeing slow growth, but the growth seen in the US data figures are superior. The BoC will not be able to fight off additional stimulus for much longer.

1D Chart of USDCAD (5Y)

1D Chart of USDCAD (5Y)