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    Canadian Dollar the Star as US Data Fails to Deliver

    Updated: May 28, 2018  

    A pick-up in the US manufacturing sector wasn’t enough to offset a weak employment report on Friday and to prevent the US dollar from sliding to a 26-month low against the Canadian dollar.

    CAD/USD rallied ahead of the release of the US Labor Department’s August data on expectations of a soft report. It then jumped as high as 0.8104 on the actual release, from levels close to 0.8006 earlier in the morning, before losing momentum and ending the week at 0.8070. Yesterday’s moves take the Canadian dollar’s gains against its American cousin to 11% since May 5th – a day on which CAD/USD traded at just 0.7250.

    The US Labor Department said on Friday that non-farm payrolls increased by 156,000 in August, below market expectations for 180,000. The unemployment rate also ticked back up to 4.4% and, importantly, growth in hourly earnings – a measure of wage inflation – fell back to 0.1%, from 0.3% in July and against a forecast of 0.2%. The employment report was followed shortly after by the latest ISM Manufacturing PMI, which improved to 58.8 in August, from 56.3 in July.

    Inflation remains crucial to the outlook for the US dollar and consequently to the CAD/USD exchange rate. The US Federal Reserve has so far remained cautionary on inflation which by one measure (monthly growth in the consumer price index) has fallen short of analyst estimates for five consecutive months.

    CAD/USD 3 Month Chart

    Coupled with Thursday’s update to the core PCE index – the Fed’s preferred inflation measure – which grew at only 1.4% in the year to July, Friday’s hourly earnings figure will do little to boost optimism in the Federal Reserve acting again this year on interest rates. Following Friday’s data, derivatives markets are still pricing in less than a 40% probability of the Fed hiking by a further quarter-point at or before its December meeting.

    In contrast to the US dollar, which has fallen hard this year, the Canadian dollar hasn’t had it this good in a long time. Further to its significant appreciation against USD, the ‘loonie’ has made impressive gains elsewhere, including a 10% rise against the Japanese yen since June and an 11% rise against the British pound since May.

    The Canadian dollar has flown since rate hike chatter began on June 12th – a day on which remarks by the Bank of Canada’s Carolyn Wilkins appeared to hint at imminent policy tightening.

    To nobody’s surprise, the Bank of Canada then hiked interest rates on July 12th to 0.75%, from 0.5%. It was the first time in seven years that the bank had raised the cost of borrowing and, by doing so, the Bank of Canada became only the second major central bank (together with the Federal Reserve) to enter a tightening cycle.

    Prospects for further hikes were boosted with Thursday’s Canadian GDP data, which showed the Canadian economy growing at its fastest annualized rate in nearly six years. Statistics Canada said that GDP grew by 1.1% in the second quarter, marking an annualized rate of 4.5%. By comparison, the US economy is growing currently at just 3.0%.

    “Wow,” said TD Bank economist Brian DePratto following the announcement of Canadian GDP.

    In comments to CBC News, DePratto said that there was “no stopping Canada of late,” and added that at least one further Canadian rate hike this year was a “done deal.”

    DePattro’s opinion is shared by analysts at Scotiabank, who said in a note to clients on Friday that they expect Canadian interest rates to be “one full percentage point higher by the end of next year.” The bank also believes that markets are yet to price in these hikes, which suggests that there remains plenty of room for the Canadian dollar to appreciate further.

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    Posted under: #News #CAD #USD

    Disclaimer: Please note any provider recommendations, currency forecasts or any opinions of our authors should not be taken as a reference to buy or sell any financial product.