USD/CAD Analysis

CAD Analysis

New COVID outbreak in Canada's Construction Industry

Over the past 2 weeks, Canada has reported a surge in COVID-19 cases especially in the construction and building industry with several construction sites reporting an increase in people falling ill and subsequently testing positive for COVID-19. As a result, many construction sites have been forced to close for the next 3 weeks until people have recovered and workers have gone to take the COVID-19 swab test. The latest list of outbreaks also included the following among newly affected construction worksites or workplaces (since April 22): Commonwealth Plywood, with an outbreak of 15 cases, reported April 23; Mizrahi Inc. (developer), two cases, April 23; REA Construction, six cases, April 24; and Reliance Construction, 11 cases, April 23. Reliance Construction was partially closed by Toronto Public Health on April 22. Another EllisDon site was partially closed April 23. (Constructconnect, 2021).

The Building and Construction Industry is a huge in Canada and it makes up almost 7.5% of the country's GDP (approximately $141 billion) and this industry could take a toll on the economy if the pandemic is not handled in an appropriate manner.

India's Surge in COVID-19 cases & Impact on Oil Futures

The production of oil has been cut in recent times and have been set to increase if the demand for oil increases in the coming month. Currently, many countries have been hit by a second or third wave of COVID-19 outbreaks in their respect country which has driven the demand low but demand is expected to pick up soon. Since many of Canada's oil rigs have not been operating at high levels, they are able to increase their supply if there is a need to. As a result, the price of oil is likely to fall in the coming months. Since the Canadian dollar is highly correlated to the price of oil, the Canadian dollar is expected to fall in the coming months.

Moreover, the future is looking quite bleak for India. India on April 29 recorded its highest number of deaths in a single day since the start of the pandemic. The country reported 379,257 new cases and 3,645 new deaths, bringing total cases to 18.38 million, according to its health ministry.

"Oil demand is recovering well in the US, Europe and China, but a surge in new COVID-19 cases in India is of concern. New restrictions in India could see global demand contract by 200,000 to 400,000 b/d this year," (S&P global Intelligence, 2021)

Also bearish for crude futures was a drop in eurozone gross domestic product. First quarter GDP fell 0.6% from the previous quarter, according to data from Eurostat, the statistical office of the EU, on April 30. Growth in China's manufacturing and services sector also showed signs of slowing. The manufacturing Purchasing Managers' Index was 51.1 in April compared with 51.9 in March, according to data published April 30 by China's National Bureau of Statistics.

USD Analysis

Fall in COVID-19 cases, swift vaccine rollout and strong potential growth

The Conference Board forecasts that US Real GDP growth is expected to rise by 6.0 percent (year-over-year) in 2021.* Following a lull in the economic recovery in November and December, growth improved in January before stalling in February due to adverse weather conditions. In March, however, the economic recovery continued to strengthen. We expect real GDP growth to accelerate further over the coming quarters as new COVID-19 infection rates decline further, the vaccination program continues to expand, and a large fiscal support program is fully deployed. Following a robust recovery in 2021, we would expect the forecasted economic growth to be about 3.5 percent (year-over-year) in 2022.

While the economy has already partially rebounded from the deep contraction in the first half of 2020, a variety of factors will determine the way forward. Key variables include: a) the spread of the virus itself; b) the deployment and effectiveness of COVID-19 vaccines; c) the impact of fiscal and monetary support; d) the status of labor markets and household consumption; and e) the pace at which mobility and travel restrictions are lifted.

With about 50% of the population in the US receiving their vaccines over the past 4 months. There are definitely signs of improvement in the US economy. With the rise of COVID-19 cases in India and Laos as well, people will soon start to back the USD as the pandemic is far from over for the emerging economies. Hence I would expect the USD to appreciate against the Canadian Dollar

Technical Analysis

From the chart above, we can observe that the USDCAD is trading at a 5 year low. It is at a strong weekly support and it has bounced up after reaching that level for the past 4 times.

The strong inverse correlation between USDCAD and WTI crude oil is further exemplified in this chart, WTI crude oil is also at a strong weekly resistance and it has failed to break past that level of US$65 per barrel for the past 3 times. From the chart above, there is also a MACD divergence on the weekly timeframe with the MACD indicator showing a lower high but the chart is showing a higher high. There also seems to be a higher chance of forming a double top which shows that a trend reversal is about to occur.

I would recommend an entry position on a shorter timeframe (maybe 4h or 8h) by looking for an appropriate reversal candlestick and a confirmation candlestick before making an entry into this trade. For this trade, I would recommend an entry position at around the 1.23000 level with a first take profit level at 1.27000, a second take profit level at 1.30000 and a stop loss at the 1.21500. The risk to reward for this trade is expected to be 2.02

Trade Management

Disclaimer: All writer's opinion are their own and nothing published by FTBT academy should constitute as financial advice for investment whatsoever. We suggest that you conduct your own due diligence before placing in a trade. FTBT academy will not be liable for any of your losses.

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