01.02.201901:02 Forex Analysis & Reviews: USD/CAD. The loonie ignored a weak GDP, but is waiting for news from China

Canadian economic growth slowed again: on a monthly basis, GDP fell to a negative area and reached -0.1% in November. In annual terms, the indicator also fell, however, was still in the "green zone": with a growth forecast of 1.6%, the indicator rose to 1.7%, while in October the growth was more significant – 2.2%.

In response to this release, the USD/CAD pair moved away from annual lows (that is, from the level of 1,3119), but the further upward dynamics was questionable. The "loonie" remains in the area of multi-month lows - the last time the pair was at the bottom of the 31st figure in November last year. If we ignore the intraday dynamics, we can say that traders actually ignored today's release, focusing on other fundamental factors.

This reaction is explained quite simply: the market was ready to slow down the Canadian economy – this was said by many experts, this was warned by the head of the Bank of Canada at the end of the last meeting. In monthly terms, the indicator fully coincided with the forecast, and in annual terms – slightly exceeded pessimistic expectations. Therefore, against the background of other events, this release did not act as a catalyst for volatility on the pair – traders showed only a formal reaction, which is unlikely to have any significant continuation.

The limiting factor was the oil, which again went up after the announcement of the results of the January Fed meeting. A barrel of Brent crude oil is now trading around 62 dollars, showing a positive trend. And the weak US dollar cannot afford to seize the initiative in the USD/CAD pair: in my opinion, the market has not fully realized the negative consequences of yesterday's meeting of the Federal Reserve. By and large, the regulator has announced a protracted pause in raising interest rates – and no one knows how long this period will be.

According to most analysts, if the key indicators of US inflation continue to show vague dynamics, the regulator may "be patient" until next year. However, even the most optimistic scenarios assume one rate hike - approximately in October or December of the current year. Therefore, the large-scale growth of the USD/CAD pair can be caused either by a significant weakening of the Canadian dollar, or by the failure of the US-China trade negotiations.

As for "internal" factors, the USD/CAD bulls have nothing to count on. On the one hand, at its January meeting, the Bank of Canada lowered its forecasts for the growth of the country's economy in 2019 (from 2.1% to 1.7%). But, on the other hand, it retained a "hawkish" attitude, to talk about their future plans. The head of the Central Bank, Stephen Poloz, said that the interest rate should eventually grow to a neutral value so that the inflation rate would be in the "necessary range." Given the fact that the latest data on GDP growth came out at a predictable level, the Canadian regulator is unlikely to change its position on this issue. The only question is when exactly the Central Bank will decide on another round of rate increase.

The next meeting of the central bank is scheduled for March 6, while most experts are inclined to believe that the rate will be raised at the April meeting (April 24). By and large, the monthly time gap does not play any role in this context, especially since the market expects another rate increase before the end of this year. In other words, the Canadian regulator is still heading for the normalization of monetary credit policy, in contrast to the Federal Reserve, which yesterday announced a pause in this matter.

Thus, internal fundamental factors will not be able to reverse the downward trend for the USD/CAD pair. But the situation with the external fundamental background looks a bit more complicated. Indeed, oil quotes are rising - the cost of Brent and WTI has increased by almost 20% since the beginning of the year, giving support to commodity currencies. However, the shadow of the trade war puts pressure on traders - if the current negotiation process ends in failure, the oil quotes will go down and the dollar, on the contrary, will gain momentum using the status of a safe-haven asset.

At the moment there is no unambiguous information about the two-day negotiations. Trump, using his usual way of communication - Twitter - stated that "good intentions and a positive attitude are felt on both sides". He also confirmed that he will meet with the head of the Chinese delegation in the Oval Office today. But then he somewhat tightened his tone, causing a certain alarm in the markets.

First, he stated that a deal could be concluded only after a personal meeting with Xi Jinping, since he needed to discuss "difficult issues" with him. Secondly, Trump delivered a new ultimatum: he said that China should open its markets not only to financial companies, but also to companies in the industrial, agricultural and other sectors. Beijing has not yet responded to these statements - it is likely that the reaction will follow after the return of the Chinese delegation to their homeland. But in general, the situation remains "in the balance": if the parties fail in negotiations, as early as March 1, the trade war will begin with a new force, and the US dollar will receive a reason for its growth.

That is why the expediency of short positions on the USD.CAD pair depends on the outcome of the US-China negotiations. If, in spite of everything, the parties parted on a positive note, the downward impulse of the loonie can be continued with the first target at around 1.3060 (the upper limit of the Kumo cloud on the weekly chart).