Forex Market: USD/CAD daily trading outlook

Yesterday’s trade saw USD/CAD within the range of 1.3669-1.3767. The pair closed at 1.3729, shedding 0.03% on a daily basis and extending the loss from Monday. The loonie has depreciated 3.06% against the greenback so far during the current month.

At 9:36 GMT today USD/CAD was gaining 0.27% for the day to trade at 1.3771. The pair touched a daily high at 1.3776 at 9:30 GMT, undershooting the upper range breakout level (R4). Support may be received at the hourly 21-period EMA (1.3736), while resistance may be encountered at the high from December 14th (1.3781) – a level unseen since June 17th 2004.

The Canadian dollar has recently been pressured by a continuous decline in oil prices. Crude oil futures for January delivery were down 0.27% on the day to trade at $36.71 per barrel as of 9:29 GMT. Oil was poised to register its ninth drop in the past 13 trading days. On Monday the commodity touched a daily low of $34.53 a barrel, which has been the lowest price level since February 18th 2009, when oil futures slipped as low as $34.13 per barrel. Crude oil has expanded losses to 11.92% of its value so far in December from an 11.49% drop a day ago.

On Wednesday USD/CAD trading may be influenced by a number of macroeconomic reports and other events as listed below.

Fundamentals

United States

Housing Starts, Building Permits

The number of housing starts in the United States probably increased to 1.140 million units in November, according to market expectations, from the seasonally adjusted annual rate of 1.060 million during the prior month. The latter has been the lowest number of starts since April 2015, when a figure of 1.036 million was reported. In October starts of single-family houses dropped 2.4% to 722 000, while starts of buildings with five units or more were 25.5% lower to reach 327 000. Housing starts fell 18.6% in the South and 16.2% in the West, while the largest increase was observed in the Midwest (+15%), followed by starts in the East (+10.2%).

Housing starts represent a gauge to measure residential units, on which construction has already begun every month. A start in construction is defined as the foundation laying of a building and it encompasses residential housing primarily.

The number of building permits in the country probably increased to 1.155 million in November from an annual level of 1.150 million in October. If expectations were met, Novembers number of permits would be the highest since August, when 1.170 permits were reported. Single-family authorizations increased at a monthly rate of 2.4% to 711 000 units in October, while permits of units in buildings with five units or more were reported to have risen 8.3% to 405 000.

Building permits are permits, issued in order to allow excavation. An increase in the number of building permits and housing starts usually occurs a few months after mortgage rates in the country have been reduced. Authorizations are not required in all regions of the United States. Building permits, as an indicator, also provide clues in regard to demand in the US housing market. In case a higher-than-anticipated figure is reported, this would support demand for the US dollar. The official report is due out at 13:30 GMT.

Industrial production, Capacity utilization

Industrial output in the United States probably expanded at a monthly rate of 0.1% in November, according to market expectations. If so, this would be the first increase in output in the past four months. In October industrial production unexpectedly contracted 0.2% from a month ago. Manufacturing production, which accounts for almost three quarters of total industrial production, expanded 0.4% in October, as the output of durable goods was 0.5% higher, while the production of non-durable goods increased 0.3%. Mining sector output contracted 1.5% during the same period, because of considerable cuts in both the extraction of crude oil and the drilling of oil and gas wells. Output in utilities shrank 2.5% in October compared to a month ago, as a drop for electric utilities was partly neutralized by a surge for natural gas utilities.

The index of industrial production reflects the change in overall inflation-adjusted value of output in the three major sectors mentioned above. The index is sensitive to consumer demand and interest rates. As such, industrial production is an important tool for future GDP and economic performance forecasts. Those figures are also used to measure inflation by central banks as very high levels of industrial production may lead to uncontrolled levels of consumption and rapid inflation. It is also a coincident indicator, which means that changes in its levels generally echo similar shifts in overall economic activity. Therefore, a larger-than-projected monthly increase in the index would usually have a moderate bullish effect on the US dollar.

The Board of Governors of the Federal Reserve is to release the production data at 14:15 GMT.

In addition, Capacity Utilization rate in the country probably remained at 77.5% for a third straight month in November. It has been the lowest utilization rate since June 2011, when a rate of 76.7% was reported. This indicator represents the optimal rate for a stable production process, or the highest possible level of production in an enterprise, in case it operates within a realistic work schedule and has sufficient raw materials and inventories at its disposal. Lower rates of capacity utilization usually imply weaker inflationary pressure.

FOMC policy decision and press conference

The Federal Open Market Committee (FOMC) will probably raise its target for the federal funds rate to 0.375% from 0.250% for the first time in the past 55 policy meetings, according to the median forecast by experts.

In October the Committee left borrowing costs intact, but left the door open for a hike in December, as policy makers abandoned previous warnings regarding the risks global financial and economic developments were posing to US macroeconomic environment.

According to extracts from the FOMC Policy Statement released in October: ”The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.”

At the same time, Fed Chair Janet Yellen demonstrated confidence in US economy. According to extracts from the statement Yellen took at the Economic Club of Washington on December 2nd 2015: ”The U.S. economy has recovered substantially since the Great Recession. The unemployment rate, which peaked at 10 percent in October 2009, declined to 5 percent in October of this year. At that level, the unemployment rate is near the median of FOMC participants most recent estimates of its longer-run normal level.”

”On balance, the moderate average pace of real GDP growth so far this year and over the entire expansion has been sufficient to help move the labor market closer to the FOMCs goal of maximum employment. However, less progress has been made on the second leg of our dual mandate–price stability–as inflation continues to run below the FOMCs longer-run objective of 2 percent.”

”I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment, further reductions in the remaining margins of labor market slack, and a rise in inflation to our 2 percent objective. I expect that the fundamental factors supporting domestic spending that I have enumerated today will continue to do so, while the drag from some of the factors that have been weighing on economic growth should begin to lessen next year.”

”On balance, economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labor market.”

The FOMC will announce its official decision on policy at 19:00 GMT. A rate hike would surely bolster demand for the US dollar. The rate decision will be followed by a press conference with the Fed Chair at 19:30 GMT. It will be closely examined by market participants and analysts for clues over the future path of interest rates after the first hike in almost a decade is introduced.

Canada

Portfolio investment in Canadian securities

Foreign portfolio investment in Canadian securities probably expanded to CAD 5.1 billion in October, according to the median forecast by experts, from CAD 3.35 billion in September. If expectations were met, it would be the largest flow of portfolio investments since June 2015, when it was reported to have amounted to CAD 8.51 billion. This indicator reflects the flow of incoming investments in the local stock, bond and money markets. An increasing flow of foreign investments is usually related with a positive economic outlook for the country being invested in. This usually increases demand for its currency and vice versa. Therefore, in case portfolio investment in Canadian securities increased more than anticipated, this would have a moderate bullish effect on the Canadian dollar. The official report by the Statistics Canada is due out at 13:30 GMT.

Bond Yield Spread

The yield on Canada’s 2-year government bonds went as high as 0.534% on December 15th, or the highest level since December 11th (0.548%), after which it closed at 0.520% to add 1.1 basis points (0.011 percentage point) compared to December 14th. It has been the 8th gain in the past 17 trading days and also a second consecutive one.

The yield on US 2-year government bonds climbed as high as 0.988% on December 15th, or the highest level since December 4th (0.991%), after which it closed at 0.972% to add 2.4 basis points (0.024 percentage point) compared to December 14th. It has been the 16th gain in the past 22 trading days and also a second consecutive one.

The spread between 2-year US and 2-year Canadian bond yields, which reflects the flow of funds in a short term, widened to 0.452% on December 15th from 0.439% on December 14th. The December 15th yield spread has been the largest one in more than seven months.

Meanwhile, the yield on Canada’s 10-year government bonds soared as high as 1.532% on December 15th, or the highest level since December 9th (1.554%), after which it slid to 1.490% at the close to add 1.8 basis points (0.018 percentage point) compared to December 14th. It has been the 6th gain in the past 17 trading days and also a second consecutive one.

The yield on US 10-year government bonds climbed as high as 2.289% on December 15th, or the highest level since December 7th (2.292%), after which it slipped to 2.266% at the close to add 4.1 basis points (0.041 percentage point) compared to December 14th. It has been the 8th gain in the past 22 trading days and also a second consecutive one.

The spread between 10-year US and 10-year Canadian bond yields widened to 0.776% on December 15th from 0.753% on December 14th. The December 15th yield difference has been the largest one since August 21st, when the spread was 0.778%.

Daily and Weekly Pivot Levels

By employing the Camarilla calculation method, the daily pivot levels for USD/CAD are presented as follows:

R1 – 1.3738
R2 – 1.3747
R3 (range resistance) – 1.3756
R4 (range breakout) – 1.3783

S1 – 1.3720
S2 – 1.3710
S3 (range support) – 1.3701
S4 (range breakout) – 1.3675

By using the traditional method of calculation, the weekly pivot levels for USD/CAD are presented as follows:

Central Pivot Point – 1.3626
R1 – 1.3889
R2 – 1.4023
R3 – 1.4286

S1 – 1.3492
S2 – 1.3229
S3 – 1.3095

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