The Canadian Dollar is not having the best of times. The coronavirus outbreak in China has shuttered factories in that country, leading to the lowest manufacturing PMI data in history.
The record-breaking drop in factory activity means that crude oil demand will be low for a long time to come. The decline in crude oil demand has imparted a negative outlook for the crude oil market in 2020, which is not good news for the CAD.
The Bank of Canada had to perform a 50 Bps rate cut to attempt to forestall a severe shock on the Canadian economy from the coronavirus outbreak and its sequelae. However, it may take more than just a rate cut to save the CAD this time around.
Today’s employment data from Canada were grossly underwhelming. Employment change, while positive, was quite modest. The unemployment rate is back at 5.6%. The Trade Balance figure showed a steep deficit of $1.5billion, a severe drop from the -$800million that the markets were expecting, and also much steeper than the -$700million seen last month. The employment numbers in the US were quite upbeat this month, which may allow the USDCAD to benefit from the divergent fundamentals.
What is the outlook for the USDCAD in the near-term and medium-term?
The near-term and medium-term outlook for the USDCAD is for more weakness on the Canadian Dollar, which should allow the USDCAD to make further inroads north of 1.3450. This level is where the highs of 6 June, 18 June 2019 and 2 March 2020 are found. Extension of the upside above 1.3450 could target 1.34656, with 1.35231 becoming relevant if 1.35656 is breached.
On the flip side, the CAD may gain some strength if fundamentals in the crude oil market improve.
In the short term, this could be a function of a consensus among OPEC + members to cut production.
In the medium and long-term, this comes from containment of the coronavirus outbreak and strong stimulus measures to stave off the economic impact of the epidemic.
1.33821 is a near-term support target, with 1.33487 and 1.32974 coming into play if the CAD picks up steam.