Canadian Dollar Recovers Poise but Technical Damage on Charts Constrains

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- CAD advances as USMCA moves toward ratification in U.S.

- Oil prices offer support as OPEC mulls more production cuts.

- Stocks also support as U.S. and China claim progress in talks.

- But technical damage on USD/CAD charts constrains CAD.

- GBP/CAD eyes YouGov poll, with risk tilted to the downside.

The Canadian Dollar was buoyed Wednesday by movement on the USMCA agreement front as well as progress toward a ‘phase one’ U.S.-China deal, but technical damage on the charts is acting as a constraint on the Loonie. 

Canada’s Dollar was held its own against a rough and ready U.S. rival through much of the Wednesday session, albeit to a lesser extent in the wake of a data dump that revealed,contrary to expectations, the U.S. economy did not slow in third-quarter after all. Instead, it actually picked up steam with annualised GDP growth of 2.1%, up from 2% in the prior quarter.

The Loonie had been aided by higher oil prices, buoyant stock markets and a generally robust appetite for risk among investors, who celebrated claims of progress from both sides in the U.S.-China trade talks throughout the morning session. The much-vaunted but still-elusive ‘phase one deal’ to end the tariff fight would be positive for the global economic outlook as well as stock markets and commodities like oil. All are important for the Canadian Dollar outlook. 

However, movement on the domestic trade front was also a notable source of Canadian Dollar resilience Wednesday. 

"Passage of the USMCA deal before next year’s Presidential election would be a supportive development for the Canadian dollar and Mexican peso," says Lee Hardman, a currency analyst at MUFG. "USD/CAD is currently testing resistance at between the 1.3300 and 1.3400 levels which has previously held in August, September, and October.” 

Above: USD/CAD rate shown at hourly intervals.

U.S. lawmakers will vote in an effort to ratify the USMCA replacement of the North American Free Trade Agreement next week, according to Maria Bartiromo of Fox Business News. Bartiromo reported Wednesday that it could pass as soon as next week, which would doubtless be welcome news across the U.S., Canada and Mexico given how more than a year has passed since the new deal was agreed but it still remains unratified. 

Passing the USMCA would eliminate one source of downside risk for the Loonie but it wouldn’t necessarily be enough to spare the Canadian currency from further losses in the weeks ahead. Much about how the Loonie trades over the coming days will be determined by technical factors on the charts as well as the market’s reading of Friday’s GDP report for September, which is the final piece of the third quarter Canadian economic puzzle. 

“Positive USMCA headlines should reinforce technical support for the Canadian dollar in the near-term as well. However, recent momentum remains to the downside for the Canadian dollar with USD/CAD having rebounded after hitting an intra-day low of 1.3042 at the end of October," says MUFG’s Hardman. 

Consensus is looking for Canada’s economy to have grown by 0.1% in September, although statistical ‘base effects’ mean this will take the annualised rate of expansion down from 3.7% in the second quarter to just 1.3% in the third. The data will be released by Statistics Canada at 13:30 on Friday.

Above: USD/CAD rate shown at daily intervals.

The Bank of Canada (BoC) is already banking on reversal of second quarter strength that it’s always viewed as “temporary” although a weaker-than-anticipated performance might be enough to get markets once again betting the BoC follows other central bank peers and cuts its own interest rate sooner rather than later. That would be bad for the Canadian Dollar.  

"Price action has been tracking a very narrow range over the past five sessions as the data calendar gas been light ahead of GDP Friday. Near-term exhaustion to topside is likely with support at the 1.3250 mark ahead of 1.3200," says Bipan Rai, head of FX strategy at CIBC Capital Markets. 

The Canadian Dollar was on a tear through much of the summer, pushing the USD/CAD rate down as far as 1.3050 before a late-October reversal took the exchange rate back toward 1.3350. That did damage to the Loonie’s prospects as far as technical analysts studying the charts are concerned. 

In short, the USD/CAD rate has in the space of a few short weeks gone from being a ‘sell-on-rallies’ prospect among analysts, investors and traders to more of a ‘buy-on-dips’ candidate. Local analysts now appear to be expecting a period of range-bound trading between around 1.32 and 1.3325.

“Stalled USD gains yesterday left a “doji” candle on the daily chart and losses today, if sustained, would suggest more weakness ahead for the USD, with firm resistance developing overhead around 1.3325/30. Pressure on support at 1.3245/55 will suggest the USD is set to give back more of the sharp advance that developed around the 19th Nov and open the door for a drop back to the 1.3175/1.3225 range,” says Juan Manuel Herrera, a strategist at Scotiabank. 

Above: Pound-to-Canadian-Dollar rate shown at hourly intervals.

Meanwhile, the Pound-to-Canadian-Dollar rate will take some of its direction from the the 22:00 release of YouGov polling data that will include ‘MRP’ projections of support for the main parties and how that’s likely to translate into parliamentary seats following the December 12 election. 

Most polls have so far focused on the popular vote and used rules of thumb to estimate implied numbers of seats but the Yougov methodology on seat numbers is a bit more scientific. Sterling wants to see the governing Conservative Party retaining or even building upon its popular support as well as being on course for a solid parliamentary majority. 

“Pro-sterling sentiment has waned over the last week as markets take note of a possible narrowing of the Conservatives’ lead in the polls over Labour,” says Shaun Osborne, chief FX strategist at Scotiabank. “A lead of ten-plus percentage points with two weeks until the election may very well lock in a Tory majority and give a boost to the pound. On the other hand, sterling may post a significant loss if the poll puts the Labour party within 8 or fewer percentage points from the Conservatives.” 

Scotiabank's Herrera said last week the Pound was enjoying a bullish alignment of trend signals on the intraday, daily and weekly 'directional-movement-indicators' and that this will initially lift the exchange rate to 1.73-1.74, before eventually taking it up to 1.78. 

However, and in the very short-term at least, the risk for the Pound-to-Canadian-Dollar rate could be to the downside because when the USD/CAD and GBP/USD rates fall at the same time, the result is always a lower GBP/CAD. 

 Above: Pound-to-Canadian-Dollar rate shown at daily intervals.

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