Daily Economic Commentary: Canada

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The loonie bowed down to the greenback last Friday as Canada's CPI failed to meet expectations, marking its longest streak in declines since 1953. This week, the loonie gears up for some volatility ahead of the BOC rate statement.

Price levels held steady in September, bringing Canada's annualized CPI down to -0.9%. This marks the fourth straight month in declines for the indicator. Meanwhile, core CPI rose by 0.3%, indicating that prices of volatile items, such as gasoline, accounted for much of the drop in CPI.

The inflation reports set the stage for the BOC interest rate decision on Tuesday. Analysts say that the absence of strong inflation pressures effectively rules out the possibility of a rate hike for this month. In fact, the central bank is expected to hold rates at 0.25% until June 2010. Recall that BOC Governor Mark Carney previously said that he will keep rates at their current level until annual inflation returns to the central bank's 2% target.

Today, data on foreign securities purchases is due 12:30 pm GMT. Net purchases of Canadian securities are expected to rise from 0.35 billion CAD to 2.97 billion CAD in August.

On Tuesday, Canada's leading index of indicators is set for release. It is expected to climb by another 1% this September. Data on wholesale sales is also due on Tuesday and is expected to slide down by 0.4% after surging by 2.8% in the previous month.

Retail sales reports are due on Thursday and this should be another high-impact release for the loonie. Sales at the retail level are expected to climb by 0.2% in September, a slight bounce from August's 0.6% drop. Core retail sales are projected to be up by 0.5%.

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The USDCAD’s rally was cut short as the Loonie reasserted itself back in yesterday’s price action. The pair fell to a low of 1.0281 before closing at 1.0292. The pair could move lower given the fact that it already closed below the psychological 1.0300 support.

Canada’s foreign securities purchases, which measures the total value of domestic stocks, bonds, and money-market assets purchased by foreigners during the reported month, surged to C$5.08 billion (C$2.97 billion consensus) after seeing it fall to C$0.37 billion last month. An expansion in the account indicates a consequent rise in capital inflows to Canada. Such is bullish for the CAD since investors need it to acquire the mentioned assets.

In the mean time, data on Canada’s wholesale sales for the month of August and the country’s leading index in September will be released today at 12:30 pm GMT. Wholesale sales are seen to have decreased by -0.4% after gaining by 2.8% in July. Meanwhile, Canada’s leading index is projected to taper to 0.9% from 1.1%.

Much weight, however, will be given to today’s interest rate decision at 1:00 pm GMT. The BOC is expected to leave its rate unchanged at 0.25%. Though, market participants will tune in more to its statements regarding its future policies. Previously, the bank stated that it would continue with the same rate until the end of the second quarter of 2010. However, there are some speculations that the bank could hike its rate as soon as expected given the improvement in its economy particularly in its housing industry. Any indication of such could further boost the Loonie which unfortunately could hurt Canada's huge export industry. This is why BOC Governor Mark Carney is left at a quandary about the bank’s policies.

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The Loonie experienced a serious butt-kicking yesterday when the Bank of Canada commented on its strength. The USD/CAD was trading at the 1.0320-1.0340 price range prior the BoC’s announcement and just surged almost 200 pips after.

The BoC, in its statement, said that they would keep interest rates steady as promised for this month at 0.25% and would remain low until June 2010. What really triggered the Loonie-selling frenzy was the BoC’s comment that the currency’s strength would eventually undo all the economic improvements seen in July. As a country with a robust export industry, Canada wants to keep its currency cheap to make sure that its exports are attractive to importers.

Meanwhile, economic data that came out of Canada was mixed. The leading index for September, which is a combined reading of ten economic indicators designed to predict the direction of the country’s economy, printed 1.1%, higher than the 0.9% expected. On the other hand, wholesale sales fell by 1.4% in August. The forecast was only a 0.4% drop.

No economic data today but we will see if the Loonie would continue its sell-off tomorrow since the August retail sales report and the BoC monetary policy report are due.

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During the earlier sessions, it looked like the Loonie was about to get another beating, but decided to fight back and actually won yesterday's trading round. The USDCAD pair went as high as 1.0584, zooming down to close at 1.0458.

We could see a lot more movement in CAD trading today as retail sales data will be available at 12:30 am GMT. Retail sales is expected to pick up by 0.3% during the month of August, while core retail sales is projected to have risen by 0.5%.

Also, later at 2:30 pm GMT, the Bank of Canada will be releasing its monetary policy report. This could provide more insight as to why the BOC wants to keep rates low until June 2010.

Given the high impact nature of these reports, they could provide more direction for the USDCAD, which has been going through roller coaster-like moves the past couple of days.

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The USDCAD was unable to decide which direction to take yesterday as it bounced up and down from the 1.0450 and 1.0530 levels. Economic data from Canada was on the optimistic side as retail sales came in better than expected. However, the CAD returned its gains as BOC Governor Mark Carney hinted that the BOC would curb the CAD strength if it continues to rise and hurt their economy.

Canadian retail sales were up by 0.8%, beating the consensus of a 0.3% rise, as higher sales in gasoline stations and car dealers surged. Analysts mentioned that job gains in the recent months have boosted consumer confidence and encouraged them to pump up their spending. Core retail sales rose by 0.5% as expected.

The CAD fell against the USD during the BOC press conference when Carney mentioned that the CAD's recent appreciation is impeding recovery in the Canadian economy. According to him, this undermines the central bank's efforts to push inflation back to their 2% target. He said that the BOC wouldn't hesitate to utilize their range of tools to prevent their local currency from rising.

Canada has no economic reports due today. Negative sentiment for the CAD could continue to affect the USDCAD's price action this Friday unless US earnings reports or existing home sales data trigger a run of risk appetite. Be careful out there!

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The Loonie wrapped last week on a weak note versus the dollar due to a broad-based decline in the US capitals markets. The USDCAD climbed to 1.0545 before closing at 1.0518.

Existing home sales in the US came in better-than-expected at 5.57 million units versus the 5.37 million initial estimate. Despite this, the equities markets together with the higher yielding currencies still tumbled perhaps due to some profit taking actions.

Meanwhile, Bank of Canada Governor Mark Carney is set to deliver a speech entitled "The Future of Financial Regulation" today at 1:00 pm GMT at the L'Autorité des marchés financiers, in Montreal. He’ll also issue another statement together with Senior Deputy Governor Paul Jenkins, about the bank’s MPC report before the Standing Committee on Finance, in Ottawa tomorrow. Just recently, the BOC decided to keep its monetary policies unchanged as they are. During his talks, market participants will probably look deeper into the matter regarding Canada’s economic situation and for clues about the BOC’s possible future monetary policy actions.

The highlight of this week, though, will be the release of Canada’s m/m GDP in August. Canada’s GDP, which will be published on October 30, is seen to gain by 0.1% in August after staying flat at 0.0% in July. An expansion in Canada’s economy would likely benefit the CAD at least in the short term.

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The USD/CAD moved higher again yesterday as the Bank of Canada’s complaints about the CAD’s “persistent strength” continues to weigh down heavily on the minds of investors. The USD/CAD opened the week at 1.0523 and closed the US session yesterday more than 150 pips higher at 1.0691.

No economic release from Canada today but do expect a talk by Bank of Canada Governor Mark Carney at 2:00 pm GMT. He is set to testify about the bank’s monetary policy before the Standing Committee on Finance. The talk could prove to be very important to investors as the CAD experienced a massive sell-off in the most recent BoC interest rate decision. If Carney starts talking down the CAD again, we might see another round of selling later!

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After getting whacked across the face the previous day, the CAD got some revenge yesterday, as it gained against the USD. The USDCAD pair ultimately closed lower at 1.0647. Still, given the relatively tight trading that occurred, could we be in line for a big splash today?

Yesterday, Bank of Canada Governor Mark Carney delivered a speech before the House of Commons Standing Committee on Finance. In his speech, Carney talked about the latest monetary policy committee meeting, pinpointing that the Canadian economy was slowly improving although some obstacles to recovery still remain. Once again, Carney mentioned that the strong appreciation of the CAD would slow down growth. If the CAD continues to make ground in the coming weeks, could the BOC make an actual move to counter this? Currency intervention anyone?

Carney will once again be speaking tonight at 8:00 pm GMT, this time in front of the Standing Senate Committee on Banking, Trade and Commerce. He will once again be talking about the recent monetary policy report. Watch out for any new developments, as traders will be listening to his every word.

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Strong buying pressure pushed the USDCAD to bust out of consolidation and break above the 1.0700 mark. Risk aversion which resulted from a weak US economic reports, combined with BOC Governor Mark Carney's comments against CAD strength, carried the USDCAD all the way up to a high of 1.0814.

In his speech yesterday, Carney reiterated that conditions in the Canadian economy have improved but the major challenges to recovery remain. One of these, according to him, was the heightened volatility and strength of their local currency. He expects that the recent appreciation of the CAD would impede growth, subdue inflation, and offset the impact of their easing policies. He then announced that the central bank expects the Canadian economy to contract by 2.4% this year and grow by 3.0% in 2010.

For today, Canada has a couple of minor inflation indicators on tap. These are the raw materials price index and industrial product price index. Both are expected to post declines in September, indicating that the strong CAD is indeed putting downward pressure on inflation. These reports are due 12:30 pm GMT.

The US third quarter GDP reading, which is also at 12:30 pm GMT, should have a larger market impact than the inflation reports from Canada. The report is expected to print 3.2% in economic growth for the third quarter after posting a 0.7% contraction in the second quarter. If the actual reading fails to hit the mark, risk aversion could push the USDCAD even higher.

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Canada

The Loonie got its spark back when the US economy showed a 3.5% expansion during the third quarter. The USDCAD pair retraced down to 1.0655 before closing at 1.0665.

No top tier economic event happened in Canada yesterday. What drove the Loonie was the better-than- expected 3Q GDP report in the US. The economy was initially thought to have expanded by only 3.2%. Still, a lot of market participants doubted the rather optimistic figure when they stayed in the sidelines the day before the report. To everyone’s amazement, the economy even grew by a larger pace of 3.5%. Risk appetite surfaced once again which led to a broad–based buying of higher yielding assets like the CAD.

Today, Canada will take cue when it publishes it m/m GDP in August. Canada’s economy is seen to have grown by 0.1% in the month after staying flat in July. The CAD could get some additional support given a positive growth in the economy.