Canadian Dollar Turns Bullish On Strong Capacity Utilisation Rate

Canadian Dollar Turns Bullish On Strong Capacity Utilisation Rate
March 13, 2018

 
Concerns of an economic slowdown, a decline in consumer confidence, and widening deficit had kept the Canadian dollar weak against the greenback for the past two months. The USDCAD pair had risen from a low of 1.2230 to a high of 1.3000 in the past one month. Anticipations of a Fed hike, tax overhaul, low unemployment rate, and strong GDP growth also aided the greenback to rise against the Loonie. However, we expect a bearish reversal in the USDCAD pair in the week ahead due to reasons given below.

The total nonfarm payroll employment increased 313,000 in February, according to the US Bureau of Labor Statistics. However, the unemployment rate was unchanged for the fifth consecutive month at a 17-year low of 4.1%. Economists had expected an addition of 205,000 jobs in February and a decrease in the unemployment rate to 4%. In the previous month, the economy added an upwardly revised 239,000 jobs. The unemployment rate stood at 4.1%.

Despite a strong increase in job growth, the average hourly earnings grew only by four cents or 0.1% m-o-m to $26.75 in February. In January, the average hourly earnings grew 0.3%. The reported figures lowered the year-on-year increase in average hourly earnings growth to 2.6%, from 2.8% in January. The US Federal Reserve is widely expected to raise interest rates at its March 20-21 meeting. However, the officials and the market are concerned about the softness in wage growth.

The Bureau of economic analysis also reported that the goods and services deficit widened to $56.60 billion in January, from $53.90 billion in December. Notably, exports declined $2.70 billion m-o-m to $56.60 in January. Imports remained almost stable at $257.50 billion. The widening of trade deficit due to a decline in exports and softness in wage growth is expected to turn the greenback weak temporarily. After a period of slackness, US’ neighbour, Canada has reported a rise in capacity utilisation rate and a decline in the unemployment rate.

According to Statistics Canada, the unemployment rate declined by 0.1% to 5.8% in February. On a y-o-y basis, employment increased by 283,000 or 1.5%. Full-time employment contributed to the entire increase in annual employment growth. Furthermore, hours worked rose by 3.2%. Analysts were expecting the unemployment rate to remain unchanged from last month at 5.9%.

The statistical organization also reported that the capacity utilization rate has increased to 86% in the fourth-quarter, from 85.1% in the prior-quarter. Analysts had expected a capacity utilization rate of 85.2%. The quarrying, mining, construction and oil and gas extraction sector contributed to the strong rise in the capacity utilization rate. In particular, the construction sector recorded its sixth consecutive capacity utilization growth of 91% in 4Q17, from 89.5% in 3Q17.

The price of crude oil, which is one of the main export products of Canada, ended with an unexpected weekly gain due to a decrease in the US oil-rig count for the first time in seven weeks. The possibility of a meeting between the US President Donald Trump and North Korea’s leader Kim Jong-un also eased tensions, removing geographical risk from the price equation of crude, at least temporarily. The WTI and Brent crude is trading at $61.30 and $64.50, respectively, at the time of writing this article. Therefore, higher capacity utilisation rate, an increase in the price of crude oil and decline in the unemployment rate is expected to turn the Canadian dollar strong in the week ahead.

The USDCAD pair has started declining after facing resistance at 1.2870. The stochastic oscillator is descending from the bullish zone. Therefore, we are anticipating the greenback to lose ground against the Canadian dollar.

USDCAD - Technical Analysis - 13th March 2018

To gain from downtrend, we may go short in the USDCAD pair near 1.2840, with a stop loss order above 1.2940. Once the short position is opened, we would place an order to book profit near 1.2580.

Likewise, we may also establish a short position in the currency pair by investing our surplus funds in a put option contract. At the time of purchasing the contract, we would make sure the USDCAD pair trades near 1.2840. Furthermore, we would select a date around March 21 for the expiry of the put option.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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