Forex Market: USD/CAD trading outlook for August 26th 2016

Yesterday’s trade (in GMT terms) saw USD/CAD within the range of 1.2899-1.2941. The pair closed at 1.2922, inching down 0.04% compared to Wednesdays close. It has been the 154th drop in the past 324 trading days. The major pair has increased its slump to 0.81% so far during the current month, following a 0.80% gain in July.

At 8:25 GMT today USD/CAD was edging down 0.12% on the day to trade at 1.2906. The pair touched a daily high at 1.2925 during early Asian trade, undershooting the daily R1 level, and a daily low at 1.2893 during the late phase of the Asian trading session.

Meanwhile, crude oil futures marked their 84th gain out of the past 179 trading days on August 25th. Oil for October delivery went up as high as $47.46 per barrel and closed at $47.33, advancing 1.20% compared to Wednesday’s close. As of 8:22 GMT today the commodity was edging down 0.27% to trade at $47.20, after going down as low as $47.14 per barrel earlier. Crude oil prices and CAD valuation tend to be strongly positively correlated.

On Friday USD/CAD trading may be influenced by the following macroeconomic reports and other events as listed below.

Fundamentals

United States

Gross Domestic Product – second estimate

The second estimate of the US Gross Domestic Product probably pointed to an annualized rate of growth of 1.1% in the second quarter of 2016, according to the median forecast by analysts. The preliminary GDP estimate for Q2, reported on July 29th, pointed to an annual growth of 1.2%, or the fastest since Q4 2015. In Q1 2016 the US economy expanded at an annualized rate of 1.1%, according to final data.

The preliminary report showed that Q2 growth was mostly driven by consumer spending, while investment activity dropped and inventories decreased for the first time since 2011.

According to provisional data, real personal consumption expenditures rose 4.2% during the second quarter, or at the fastest rate since Q4 2014, following an increase by 1.6% in Q1. This component added 2.83 percentage points to growth, or the most in six quarters.

Fixed investment shrank 3.2% in Q2, following a 0.9% drop in the prior quarter. Non-residential investment contracted at a slower 2.2% in Q2, while residential investment shrank at a preliminary 6.1% during the period, after increasing 7.8% in Q1. Fixed investment subtracted 0.52 percentage points from US growth.

Private inventories subtracted 1.16 percentage points from economic growth in Q2, after shedding 0.41 percentage points in Q1.

Government expenditures shrank 0.9% and subtracted 0.23 percentage points from growth during the same period, after contributing 0.28 percentage points in Q1, according to preliminary data by the US Bureau of Economic Analysis.

US exports rose 1.4% in Q2, following three consecutive quarters of decline. At the same time, the nation’s imports went down 0.4% in Q2, while extending the drop in the first quarter, which resulted in a positive impact on GDP growth during the period (adding 0.23 percentage points, or the highest contribution since Q3 2014).

In case the growth rate revision down was steeper than projected in Q2, this would have a strong bearish effect on the US dollar. The second GDP estimate is to be released at 12:30 GMT.

Reuters/Michigan Consumer Sentiment Index – final reading

The monthly survey by Thomson Reuters and the University of Michigan may show that consumer confidence in the United States improved in August from a month ago. The final reading of the corresponding index, which usually comes out two weeks after the preliminary data, probably came in at 90.6, up from a preliminary value of 90.4. In July the index stood at a final reading of 90.0, up from a preliminary value of 89.5. The survey encompasses about 500 respondents throughout the country. The index is comprised by two major components, a gauge of current conditions and a gauge of expectations. The current conditions index is based on the answers to two standard questions, while the index of expectations is based on three standard questions. All five questions have an equal weight in determining the value of the overall index.

According to the preliminary report, the sub-index of current economic conditions, which measures US consumers’ views of their personal finances, went down to 106.1 in August from a final reading of 109.0 in July. The sub-index of consumer expectations accelerated to a flash reading of 80.3 in August from a final value of 77.8 in July.

Respondents in the August survey expect that the rate of inflation during the next year will probably be at 2.5%, down from 2.7% as expected in the July survey.

In case the final value of the August consumer sentiment index outpaced the median forecast by analysts, this would have a moderate bullish effect on the US dollar. The final reading is due out at 14:00 GMT.

Fed’s Yellen statement at the Jackson Hole symposium

At the same hour Federal Reserve Chair, Janet Yellen, is expected to speak at the Jackson Hole Economic Policy Symposium in Wyoming, which commenced yesterday. Sponsored by the Federal Reserve Bank of Kansas City since 1978, the forum is attended by central bankers, policy experts, academics and financial market investors, who discuss a number of economic topics, including monetary policies. In case Yellen offers clues over the timing of the next rate hike, or any remarks on US macroeconomic outlook, USD volatility would certainly increase.

Bond Yield Spread

The yield on Canada’s 2-year government bonds went as high as 0.592% on August 25th, or the highest level since August 17th (0.603%), after which it closed at 0.591% to add 1.8 basis points (0.018 percentage point) compared to August 24th.

Meanwhile, the yield on US 2-year government bonds climbed as high as 0.797% on August 25th, or the highest level since July 7th (0.807%), after which it fell to 0.793% at the close to add 2.7 basis points (0.027 percentage point) compared to August 24th.

The spread between 2-year US and 2-year Canadian bond yields, which reflects the flow of funds in a short term, widened to 0.202% on August 25th from 0.193% on August 24th. The August 25th yield spread has been the largest one since August 11th, when the difference was 0.208%.

Daily, Weekly and Monthly Pivot Levels

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

R1 – 1.2926
R2 – 1.2930
R3 (Range Resistance – Sell) – 1.2934
R4 (Long Breakout) – 1.2945
R5 (Breakout Target 1) – 1.2959
R6 (Breakout Target 2) – 1.2964

S1 – 1.2918
S2 – 1.2914
S3 (Range Support – Buy) – 1.2910
S4 (Short Breakout) – 1.2899
S5 (Breakout Target 1) – 1.2885
S6 (Breakout Target 2) – 1.2880

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

Central Pivot Point – 1.2871
R1 – 1.2977
R2 – 1.3084
R3 – 1.3190
R4 – 1.3297

S1 – 1.2764
S2 – 1.2658
S3 – 1.2551
S4 – 1.2445

In monthly terms, for USD/CAD we have the following pivots:

Central Pivot Point – 1.3038
R1 – 1.3244
R2 – 1.3460
R3 – 1.3666
R4 – 1.3872

S1 – 1.2822
S2 – 1.2616
S3 – 1.2400
S4 – 1.2184