Forex Market: USD/CAD daily trading outlook

Yesterday’s trade saw USD/CAD within the range of 1.3724-1.3849. The pair closed at 1.3794, gaining 0.47% on a daily basis. It has been the first gain in the past three trading days. The daily high has been the highest level since May 19th 2004, when a high of 1.3921 was registered.

At 9:37 GMT today USD/CAD was gaining 0.22% for the day to trade at 1.3813. The pair touched a daily high at 1.3817 at 8:10 GMT. Support may be received at the hourly 21-period EMA (1.3790), while resistance may be encountered at the high from December 16th (1.3849).

The Canadian dollar has recently been heavily influenced by a continuous decline in oil prices. Crude oil futures for January delivery were down 1.00% on the day to trade at $35.16 per barrel as of 9:33 GMT, after falling to as low as $34.99 earlier. Oil was poised to register its tenth drop in the past 14 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 15.45% of its value so far in December from an 11.92% drop a day ago.

On Thursday USD/CAD trading may be influenced by a number of macroeconomic reports as listed below.

Fundamentals

United States

Initial, Continuing Jobless Claims

The number of people in the United States, who filed for unemployment assistance for the first time during the business week ended on December 11th, probably decreased to 275 000, according to market expectations, from 282 000 reported in the preceding week. The latter has been the highest number of claims since the business week ended on July 3rd, when a figure of 297 000 was reported.

The 4-week moving average, an indicator lacking seasonal effects, was 270 750, marking an increase by 1 500 compared to the preceding weeks unrevised average.

The business week, which ended on December 4th has been the 40th consecutive week, when jobless claims stood below the 300 000 threshold, which implied a healthy labor market.

Initial jobless claims number is a short-term indicator, reflecting lay-offs in the country. In case the number of claims met expectations or dropped further, this would have a moderate bullish effect on the US dollar.

The number of continuing jobless claims probably dropped to the seasonally adjusted 2 203 000 during the business week ended on December 4th from 2 243 000 in the preceding week. The latter represented an increase by 82 000 compared to the unrevised number of claims reported in the week ended on November 20th. This indicator reflects the actual number of people unemployed and currently receiving unemployment benefits, who filed for unemployment assistance at least two weeks ago.

The Department of Labor is to release the weekly report at 13:30 GMT.

Philadelphia Fed Manufacturing Survey

The Philadelphia Fed Manufacturing Index probably slowed down to a reading of 1.5 in December, according to the median forecast by experts, from 1.9 index points reported in November. The index is based on a monthly business survey (the Business Outlook Survey), measuring manufacturing activity in the third district of the Federal Reserve, Philadelphia. Participants give their opinion about the direction of business changes in overall economy and different indicators of activity in their companies, such as employment, working hours, new and existing orders, deliveries, inventories, delivery time, price etc. The survey is conducted every month since May 1968. The results are presented as the difference between the percentages of positive and negative projections. A level above zero is indicative of improving conditions, while a level below zero is indicative of worsening conditions. Lower-than-expected index readings would usually have a moderate bearish effect on the greenback. The Federal Reserve Bank of Philadelphia is expected to release the official results from the survey at 14:30 GMT.

Leading Indicator by the CB

The Conference Board Leading Economic Index for the United States probably increased 0.1% in November compared to a month ago, according to the median estimate by experts. In October the index rose at a monthly rate of 0.6%.

It encompasses a variety of economic indicators, which signify possible changes in overall economic activity. The index is comprised by the following components: average weekly hours in manufacturing, average weekly initial claims for unemployment insurance, manufacturers’ new orders, consumer goods and materials, ISM Index of New Orders, manufacturers new orders, non-defense capital goods excluding aircraft orders, building permits, new private housing units, Stock prices, 500 common stocks, Leading Credit Index, interest rate spread, 10-year Treasury bonds less federal funds, average consumer expectations for business conditions. A better-than-expected performance of the index would have a moderate bullish effect on the US dollar. The Conference Board research group will release the official data at 15:00 GMT.

Federal Reserve raises borrowing costs for the first time since 2006

The US dollar was largely supported, after the Fed raised the target range for the federal funds rate by 0.25% to 0.50% at the policy meeting held yesterday. Policy makers cited a significant improvement in the US labor market and showed reasonable confidence about annual consumer inflation reaching the Banks inflation objective of 2% in a medium term. However, according to the Banks official Policy Statement, the federal funds rate will probably stay below long-run levels for some time, which was taken as an indication that future rate increases may be gradual.

According to extracts from the Federal Reserves Statement released yesterday: “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal.”

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Bond Yield Spread

The yield on Canada’s 2-year government bonds went as high as 0.564% on December 16th, or the highest level since December 9th (0.580%), after which it closed at 0.552% to add 3.2 basis points (0.032 percentage point) compared to December 15th. It has been the 9th gain in the past 18 trading days and also a third consecutive one.

The yield on US 2-year government bonds climbed as high as 1.021% on December 16th, or the highest level in more than 11 months, after which it closed at 1.009% to add 4.1 basis points (0.041 percentage point) compared to December 15th. It has been the 17th gain in the past 23 trading days and also a third 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 0.457% on December 16th from 0.452% on December 15th. The December 16th yield spread has been the largest one in more than 11 months.

Meanwhile, the yield on Canada’s 10-year government bonds soared as high as 1.531% on December 16th, after which it slid to 1.511% at the close to add 2 basis points (0.02 percentage point) compared to December 15th. It has been the 7th gain in the past 18 trading days and also a third consecutive one.

The yield on US 10-year government bonds climbed as high as 2.332% on December 16th, or the highest level since December 4th (2.358%), after which it slipped to 2.298% at the close to add 3 basis points (0.03 percentage point) compared to December 15th. It has been the 9th gain in the past 23 trading days and also a third consecutive one.

The spread between 10-year US and 10-year Canadian bond yields widened to 0.787% on December 16th from 0.776% on December 15th. The December 16th yield difference has been the largest one since August 19th, when the spread was 0.809%.