Daily Economic Commentary: Canada

Trading Discussion News and Economy
102

The CAD left the USD badly bruised in Friday’s battle as the CAD emerged as one of the strongest performing currencies last week. Although commodity prices consolidated as the week came to a close, fundamental strength of the Canadian economy gave the CAD enough energy to keep fighting.

Canada’s trade deficit narrowed from 1.99 billion CAD to 0.93 billion CAD in September, reaching its three-month low. Components of the report show that the improvement in the trade balance was caused by a 3.5% surge in exports. Also, underlying data hinted that Europe, which made a large contribution to the rise in exports, may overtake the US as Canada’s major trading partner.

Up ahead, Canada has several important economic reports set for release this week. Today, data on manufacturing sales is due 1:30 pm GMT. It could show that the total value of sales made by manufacturers in September rose by 1.0% after sliding down by 2.1% in August.

On Wednesday, Canada’s inflation reports are due by 12:00 pm GMT. Their CPI is expected to climb by 0.2% while its core CPI is projected to stay flat.

Finally, on Thursday, Canada will release data on its foreign securities purchases, leading index, and wholesale sales. Would we see foreign securities rise from 5.08 billion CAD to 6.63 billion CAD? Could the leading index post an 0.8% increase as expected? And would wholesale sales meet the consensus of a 0.3% decline? Stay tuned during the release of these reports at 1:30 pm GMT for the answers!

103

The Loonie was able to extend its winning streak to two this week as it closed positively over the greenback yesterday. The USDCAD, despite some volatile trading during the US session, finished the session at 1.0471.

Canada’s manufacturing sales surprisingly rose by 1.4% in September (vs. 1.0%) after falling by 1.8% during the previous month. Based on the report, the latest quarter-over-quarter annualized sales growth in manufacturing is its fastest pace in about seven years. Still, some economists think that this cannot be sustained over a longer term given the appreciation of the CAD and the weak demand from the US. In any case, this positive result coupled with the broad-based buying in US equities pushed the CAD higher against the USD.

No economic reports are due today in Canada. In the US, the main economic card would be the release of its October PPI at 1:30 pm GMT. The PPI for the month of October is seen to have risen to 0.6% from -0.6%. A rise in the PPI could translate to a similar advance in inflation since input prices are usually transferred to consumers. Hence, the estimated jump in the PPI, if it comes in at least in line with expectations, could benefit the CAD once again.

104

The USDCAD attempted to rally early during the European session yesterday but failed to follow through once the US session rolled along. The pair hit a high of 1.0620 before reversing its gains and closing the US session at 1.0510.

The USDCAD probably rallied because of two things: Obama’s call for China to allow their local currency, the renminbi, to appreciate versus the dollar and currency traders taking profit.

On the economic front today, expect to see the country’s Consumer Price Index at 12:30 pm GMT. The CPI tends to garner a lot of attention amongst currency traders because it is the Bank of Canada’s primary measure of inflation. Usually, rising inflation means that interest rates have to be increased in the future. The headline CPI report is expected to show that the prices of goods and services purchased by consumers increased by 0.2% in October. Meanwhile, the core version of the report that excludes the prices of volatile items such as food and energy is expected to have risen only 0.1%.

105

The USDCAD sailed quietly through the night, as it stayed within range in yesterday’s trading session. Pair closed slightly higher at 1.0545. Could this be the lull before the storm?

Yesterday’s CPI report showed that consumer prices rose by 0.1% on an annualized rate. This marked the first uptick in the annualized rate in over 5 months despite the headline figure showing that consumer prices fell by 0.1% in October. Despite the increase, we probably shouldn’t start thinking that the Bank of Canada will be raising rates any time soon. The BOC will probably want to maximize the effects of having low interest rates before hiking them. The BOC predicts that inflation will only hit its 2% target in mid 2011.

For today, we’ve got 2nd tier on deck, with the leading index and wholesales sales reports due at 1:30 pm GMT. The leading index is projected to rise by 0.8%, indicating that economic conditions are slowly improving, while wholesale sales is estimated to have grown by 0.6% in September. If these come in significantly better, we could see some CAD buying take place.

I’ve got BOC Governor Mark Carney’s speech at 11:05 pm GMT circled on my calendar. His speech is entitled “The Future of the International Monetary System.” Let’s see what he has to say about this. Also, given the results of the CPI report yesterday, I’m interested to see if he talks down any speculation about a potential rate hike.

106

Propelled by risk aversion, the USDCAD soared all the way to a high of 1.0690 yesterday. Commodity prices slid lower, dragging down the com-dolls AUD, NZD, and CAD.

Economic data from Canada was unable to provide support for the CAD as most reports came in weaker than expected. Canada’s leading index for October rose by 0.7%, coming short of the consensus of a 0.8% increase. October’s uptick pales in comparison to the index’s 1.1% rise seen in both August and September.

Wholesale sales for September also failed to meet expectations as it printed a mere 0.2% increase, which was much lower than the estimated 0.6% rise. A drop in car sales for the month offset the huge gains in sales of machinery and electronic equipment.

In contrast to these weak reports, September foreign securities purchases beat the consensus by a mile and posted an impressive gain over the August reading. Foreign purchases of Canadian securities stood at 13.59 billion CAD in September, a huge leap from the previous month’s 5.07 billion CAD. Still, this upbeat report was unable to prevent the CAD from losing ground against the USD.

Today, the price action could cool off as both Canada and US have no economic reports due. Would the CAD be able to recover some of yesterday’s losses?

107

The Loonie continued to weaken against the dollar last Friday despite the lack of economic flows from the US and Canada. The USDCAD went as high as 1.0732 before closing at 1.0699.

Canada’s week will kick off with the release of its retail sales figures at 1:30 pm GMT today. The headline retail sales are seen to have expanded again by 0.6% in September after already gaining by 0.8% during the previous month. The core account, which excludes the sales of automobiles, is also estimated to have gained by 0.4% on top of its 0.5% increase in August. Retail sales are one of the tools used to measure Canada’s consumption. Since consumption takes up about 55.5% of the Canada’s GDP, a jump in the retail sales could reflect well in its economy and its currency as well.

On November 27, Canada’s current account balance will be due. Canada’s current account deficit is projected to have improved to –C$10.7 billion during the third quarter from -C$11.2 billion. Current account is the broadest measure of trade. Its release, however, could have a muted impact on the CAD’s short term valuation since Canada’s trade balance for September was already reported. Canada’s trade deficit came in better than expected at –C$0.9 billion versus the –C$1.6 billion consensus. Given this, we could also see a positive upside in Canada’s current account.

108

After four days of losing, the Loonie finally had managed to show some strength in yesterday’s trading session. The USDCAD, after hitting a high of 1.0730 during the Asian session, was sold off convincingly and headed back towards the 1.0550 region.

The USDCAD was propelled the unexpected results from Canada’s retail sales report for September. According to the report, retail sales in grew 1.0%, higher than the 0.6% consensus. The core version of the report, which excludes car sales, also shared the same positive tone. It printed a climb of 1.1%, more than double the 0.4% increase initially expected. It seems that momentum in consumer demand is starting to pick up… And if the labor market continues to post gains, we might see further growth in the retail sector.

No economic data due from Canada today but we will be seeing some important reports from the US. Specifically, these are the preliminary GDP report for the third quarter of this year and the CB consumer confidence survey. Both are market moving data so expect quite a bit of volatility during the US trading session. Head on over to my US update for more info about these reports.

109

The Loonie went in circles yesterday, before ending up right where it started at 1.0579. With the pair ranging yesterday, could we see more of the same today? Or could we be in for a surprise?

The CAD traded up and down yesterday, although it initially looked like it was going to lose out against the dollar, as the USDCAD pair jumped to as high at 1.0638. It’ll be interesting to see what happens today, as many reports will be released from the US tonight. I also wouldn’t be surprised if traders close their positions as they head off for the holidays.

With no high impact reports due till Friday, watch out for any spikes due to low liquidity in the markets on Thursday.

110

The CAD was able to take full advantage of USD weakness yesterday as the Russian central bank declared their intention to increase their CAD reserves. Speculations that this could be Russia’s first move to diversify away from the USD brought the USDCAD all the way down to 1.0450.

In terms of economic reports, the coast was clear for Canada yesterday. No economic reports are due from Canada again today and the US economic schedule is on holiday-mode as well. Still, we know how volatility tends to spike during the Thanksgiving holidays, so be careful out there!

111

Looks like Canadians didn’t have too much to be thankful for yesterday, as they saw their currency simply melt away against the USD. The CAD lost all it’s gains and more from the previous day, as the USDCAD pair closed above the 1.0600 handle. Oh well, there’s always Black Friday…

Tonight, the Canadian current account will be released at 1:30 pm GMT. It is expected to show that the trade deficit for last quarter is 12.9 billion CAD. Take note that this is based on data that was already previous released (through the trade balance report), so this shouldn’t have too much of an impact on the markets.

112

It was quite a volatile day for the Loonie last Friday. The USDCAD pair soared from 1.0600 all the way to 1.0750 only to fall back again to 1.0600. What a rollercoaster ride it was?! Whew.

The USD drew first blood from the CAD given the overall weakness in the capitals markets. Suddenly, investors were again worried about the health of the global economy because Dubai, which is perceived to be one of the richest states in the world because of its oil and fabulous tourism industry, was threatening to default on its sovereign debts.

Meanwhile, Canada’s current account deficit ballooned to –C$13.1 billion in from –C$11.9 billion during the third quarter of the year due to a weak rise in exports. This score marked its fourth consecutive quarterly deficit. Though, the latest mark was smaller than the -C$13.35 billion estimate. The 9% rise of the Loonie over the dollar since March plus the weak US consumer demand was putting a strain on Canada’s recovery due to their negative effects on the country’s exports.

It appeared, however, that investors put emphasis on the better-than-expected result given the CAD’s sharp appreciation following the report. Some profit taking actions could also have contributed to the CAD’s late rise.

Today, much of the attention will be focused on release of Canada’s GDP at 1:30 pm GMT. Canada’s economy is seen to have expanded by 0.4% in September after falling by 0.1% during the month prior. However, we could be up for a negative surprise given the jump in Canada’s current account deficit. Ironically, a worse-than-expected result, in a way, would benefit Canada in the longer term because of its bearish effect on the CAD.

113

Choppy trading for the Loonie yesterday, as the CAD didn’t make much headway against the USD despite the Canadian GDP release indicating that Canada climbed out of recession. The USDCAD closed just 25 pips lower for the day at 1.0554.

Woohoo! Time to celebrate – Canada is finally out of a recession! The economy grew by 0.4% in September, and by the same amount on an annualized basis for the third quarter. Still, it seems that traders and investors wanted more cake and well, this 0.4% rise just wasn’t enough! Predictions were calling for a 1.0% annualized gain, so this may have dampened the good news.

Even though the Canadian economy is now out of a recession, don’t expect the Bank of Canada to suddenly withdraw stimulus or hike rates. BOC officials have said that while they expect 2010 to be better, growth will be slow. They point to rising unemployment and a strong CAD as potential obstacles towards recovery. Legitimate reasons if you ask me – people can’t spend if they have no work and exports will be hurt if the CAD becomes too expensive for importers of Canadian goods.

114

The USDCAD was off on a slow start yesterday as it consolidated during the Asian and European sessions. Upon the release of US economic reports during the US session, the CAD was able to make a run for it. Gold prices, which soared to new highs, provided further strength for the CAD.

It seems that traders have already moved on from the risk aversion spurred by Dubai’s debt problems as strong economic reports brought risk appetite back into play. Although Canada didn’t release any reports yesterday, the CAD was able to benefit from upbeat economic data from the US, namely the pending home sales and construction spending figures.

Canada’s economic schedule is report-free for the next 24 hours, which means that the CAD could take cue from US economic reports again. Today, the US will release the ADP non-farm employment report, which could spark some volatility during the US session. Keep an eye out for commodity prices, which could also provide direction for the USDCAD pair.

115

The Loonie surrendered some of its gains over the dollar in yesterday’s relatively quiet trading. The USDCAD closed at 1.0503 after falling to a low of 1.0432. The 1.0500 level appears to be keeping the pair afloat. Will it continue to hold the pair higher?

Nothing was due in Canada yesterday. Today will be quiet as well in terms of economic reports. But with the US initial jobless claims seen to have risen to 479,000 from 466,000 for the week ending November 28, the CAD could hit another snag and decline against the USD.

116

It was a loony day for the CAD yesterday as it turned over some more ground back to the dollar. The 1.0500 support indeed held, pushing the USDCAD to close higher at 1.0550.

No economic reports were due in Canada yesterday. The Loonie started to slip late in the euro session and was further pushed back when ECB President Trichet he commented that “Liquidity will remain extremely abundant for a large number of months to come.” The dollar gained across the board following his remarks.

The Loonie further lost support when the US ISM services PMI came out with a disappointing result.

Today (12:00pm GMT), Canada’s employment change will be reported. Market participants see a 15,300 increase in employment in November after losing about 43,200 jobs in October. With Canada out of the recession, employers are believed to have hired workers again. The unemployment rate, though, is still expected to stay at 8.6%. Nonetheless, the improvement in Canada’s labor market could be bullish for the CAD.

Later in the day, Canada’s Ivey PMI is expected to have dropped slightly to 60.4 in November from 61.2. Still, the account remains to be above 50.0 which indicates expansion in the overall economy.

117

It looked like the CAD was going to be heading for new highs once news broke out that a lot more jobs were added to the economy, but the Loonie lost its bearing once traders suddenly bought up the USD after the NFP report was released! In the end, the USDCAD pair finished higher, to closing near its weekly opening price at 1.0581.

Canadians looking for work got some great news on Friday, as 79,000 jobs were added to the economy this past November. It was initially projected that employment would rise by just 15,000. As a result, the unemployment rate dropped to 8.5%. My contacts from the Great White North told me that the surge in employment was caused by a sharp rise in the service sector, more specifically in the education sector. Glad to know that they’re prioritizing their studies up in Canada…

Also released on Friday was the Ivey PMI report, which gave a little bit of bad news as it came out worse than expected. The index printed a reading of 55.9, much lower than the expected 60.4 score. Take note that this still indicates that that the economy is expanding. Nonetheless, the report was probably largely overlooked, as it was released following the aftermath of the US NFP report.

Over the next couple of days, we could see more volatile movement in CAD trading as some high impacts reports will be released. Tonight at 1:30 pm GMT, the building permits m/m report is scheduled to be released and is expected to show that the number of building permits issued in October rose by 1.1%.

The housing data continues tomorrow at 1:15 pm GMT, when the housing starts report is released. While the report is released monthly, it is a measure of the annualized rate of new homes that began construction in the previous month. The rate is expected to have increased only slightly from 157,000 to 158,000.

I have to warn you though, market participants may not react to the report, as the Bank of Canada’s interest rate decision follows at 2:00 pm GMT. It is expected that BOC Governor Mark Carney and his posse would not hike interest rates. I want to see what else they have to say about the economy.

118

Not so fast! The CAD put up a strong fight against the USD yesterday as the USDCAD fell from 1.0650 to 1.0510 during the US session. The rise in Canada’s building permits for October gave the CAD enough strength to overpower the USD.

Building permits shot up by a whopping 18.1% in October, reaching its highest level in almost fourteen months. The CAD was able to build up momentum after this report, which came at the heels of last Friday’s unbelievably strong Canadian employment report.

The question is: Would these remarkable improvements in the Canadian economy be enough to convince the BOC to hike rates up? Well, we’ll find out today! Recall that BOC Governor Mark Carney has emphasized that the central bank will keep rates low probably until June next year, but who knows? The recent set of strong data could allow the BOC to take a more hawkish stance. The BOC rate decision is scheduled at 2:00 pm GMT, right after the release of Canadian housing starts data at 1:15 pm GMT.

119

The 1.0500 mark proved to be a solid support yet again as the USDCAD simply bounced from it to close at 1.0639. Will the Loonie regain its losses from yesterday? Or will the USD bulls take charge of today’s trading as well?

Not even the 18.1% jump in Canada’s building permits was enough to encourage the BOC to hike its rates. As expected, the bank kept its interest rate untouched at 0.25%. The bank is likely to keep its rate as is until July 2010 since the country’s inflation is still far from the bank’s 2% target. Inflation is projected to meet the said target on June 2011. That is about a year and a half away so anything can happen still. In any case, the bank’s outlook on the economy remains bright. And with the improving domestic demand and upbeat developments in its trading partners, meeting the inflation target soon is also a possibility.

No major economic reports are due in Canada and the US today. The Loonie may just be range bound given the lack of economic flows.

120

Despite Canada’s empty economic cupboard yesterday, the CAD was able to stage a nice 100 pip rally against the USD yesterday. This allowed the CAD to get back most of its losses from the USD strength on Tuesday. The USDCAD is still well within its trading range though.

From the looks of it, the CAD’s rally was mainly caused by the improvement in oil prices and the modest rise in stock prices yesterday.

The important data coming out of Canada today is its trade balance report for the month of October at 1:30 pm GMT. The forecast is that its trade deficit eased 600 million CAD from 900 million CAD the month prior. A deficit balance means that more booze, gadgets, food or whatever goodies you could think of were imported than exported. A rising trade balance (or an easing trade deficit in this case) is usually seen as bullish for the domestic currency. Remember, whenever foreign countries need to buy goods from others, they need to first buy up that country’s domestic currency.

121

Much like it’s com-doll siblings, the CAD posted some decent gains against the USD. The Loonie finished the trading day at 1.0507, closing at a new low for the week.

The CAD got a nice boost from the trade balance report, which came out to show a trade surplus of C$248 million in October. This was a major reversal from September’s figure of a deficit of C$850 million. In addition, it was expected that the deficit would only shrink to C$600 million! The sharp rise in the trading account was due to a rise in exports of 3.4%, while imports fell by 0.8%.

Tonight, the new housing price index will be released. The time of release is still tentative, so stay on your toes. No forecasts have been made for the report, although last month’s reported printed a 0.5% increase in the prices of new homes.