The loonie has been under pressure after the October FOMC statement reintroduced the possibility of a rate hike in December. Comments from Federal Reserve Chair Janet Yellen during her testimony before congress where she called the December rate hike a live possibility have boosted the USD. Oil prices have kept the CAD from losing too much ground versus the USD but crude inventories are putting downward pressure. The pair is trading at 1.3162 and has been caught in a range between 1.3155/65.
Canada’s PMIs Lower as Oil Price Headaches Eroding Confidence
At the start of the week the RBC manufacturing PMI delivers somber news with a decline further into contraction at 48 from a previous reading of 48.6. The contraction seen in Canadian factories is a by product of a strong loonie fuelled by a high oil price two years ago. Canadian manufactured goods were not as attractive and major employers started shutting down factories. The current levels at which crude is trading have brought the energy industry crashing down and have left the Canadian economy reeling as it seeks a way to offset those losses.
The Ivey PMI release was lower than anticipated at 53.1 versus the forecasted 54.0. The health of the Canadian economy is under threat as the damage done by lower oil prices have dealt a blow to the manufacturing sector. Services have been the positive story, but not enough to offset the losses from manufacturing and energy exports.
U.S. and Canadian Trade Balances Shrank
The trade balance figures from Canada and the United States narrowed their deficits in September. Canadian exports grew 0.7 percent and there were positive signs that final destinations are more diversified while imports fell 1.3 percent. Canadian data was overshadowed by the positive U.S. trade balance. The U.S. trade deficit narrowed by 15 percent after exports bounced back and imported shrank. The Federal Reserve and Corporate America continued to question the potential impact of a strong USD hurting exports. The trade balance reassured the markets that a strong currency does not need to be toxic to growth. The economic indicators this week will lead up to the non-farm payrolls on Friday and a strong showing could put the December interest rate hike back on the table for good.
NFP to Decide Fate of December Rate Hike
The highlight of the week will be the U.S. non farm payroll (NFP) report that will be published on Friday, November 6. At the same time the Canadian jobs report will be released. The trend for both reports has been diverging with the U.S. data losing traction, while Canadian jobs continue to beat expectations. The size of the economy and the significance of the NFP will give the American data bigger significance. That being said the fact the there is Canadian data to compare will give the loonie some arguments and not be at the total mercy of the U.S. data.
The interest rate divergence that has been feeding the USD rally has stumbled as the market has gone from discarding a U.S. interest rate hike as the Fed has mismanaged its communications with the market. The latest comments from Fed Chair Janet Yellen and the October FOMC statement have given strong hints that could all change on Wednesday, December 16.
Canadian events to watch this week:
Friday, November 6
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
8:30am CAD Building Permits m/m
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Alfonso Esparza
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
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