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Canada manufacturing sales for July +0.1% vs. +1.0 estimate
The prior month sales data rose by +0.8%
USD/CAD forecast for the week of September 12, 2016
The USD/CAD pair initially fell during the course of the week, but turned back around to form a bit of a hammer. This was especially impressive considering that we are now above the 1.30 level, and now I’m starting to forget about the uptrend line that’s on the chart, as I think we are more or less going to continue to see a very slow upward grind longer term. Pay attention to the oil markets, because they of course have a significant effect on the Canadian dollar itself.
Canada’s Dismal Second Quarter GDP Is Worse Than It Looks
Canada’s second-quarter contraction was the worst since 2009, but a closer look at the numbers reveals a more troubling trend.
For the first time, Canadian household debt is bigger than the country’s gross domestic product. Household debt rose to 100.5% of GDP in the second quarter, up from 98.7% in January-March, Statistics Canada reported last week. In the same quarter, the ratio of debt to disposable household income swelled to 167.6%, up from 165.2%. That gives Canada the distinction of being the most indebted nation in the Group of 7.
Total credit market debt rose to $1.97 trillion at the end of June. Consumer credit alone was $585.8 billion, while mortgage debt reached $1.29 trillion.
Since mid-2015, Canada’s debt-to-income ratio has risen by an average of 5.2%, according to CIBC World Markets. However, incomes aren’t rising nearly as fast, fueling fresh worries about an unsustainable credit bubble.
The Bank of Canada (BOC) has warned against record consumer debt and an unstoppable housing boom, but has resisted implementing higher interest rates. The Bank is not expected to tighten policy anytime soon, as consumer spending and real estate remain the only major drivers of a moribund economy struggling with plunging oil prices and weak international demand.
Historically, Canadians have shown no aversion to debt. The availability of cheap credit and rock-bottom interest rates has given households more reason to pile on liabilities in the form of credit and mortgages.
On the plus side, low borrowing rates have allowed Canadians to better service their debt. The debt-to-service ratio was unchanged at 14.2% in the second quarter. What’s more, rising home values helped boost household net worth by 1.9% in April-June.
Canada’s GDP contracted at an annualized 1.6% in the second quarter, much worse than the BOC’s forecast of a 1% contraction back in June. The declines came as the oil-producing province of Alberta fought devastating wildfires, forcing tens of millions of barrels of crude production offline.
The economy is expected to rebound sharply in the third quarter, thanks in part to a strong handoff from June. GDP expanded 0.6% during the month, fully reversing May’s 0.6% drop. According to the Royal Bank of Canada (RBC), the nation’s largest bank by market capitalization, the economy is set to grow at an annualized 3.7% in the third quarter. Low borrowing rates, fresh federal stimulus and rebounding oil prices were all cited as positive contributors to growth in the July-September period.
A stronger economy is unlikely to pull the Canadian dollar out of the doldrums. That’s because the US Federal Reserve is expected to raise interest rates within the next six months, which will give rise to the US dollar.
USD/CAD Recovers Losses On a Weaker Loonie
Following a decline at this week’s open, USD/CAD was seen recovering despite oil prices holding firm and the US Dollar drifting lower.
USD/CAD made a bullish break above 1.3142 resistance on Tuesday, but has failed to move higher as oil prices remain well supported. The momentum in the decline seen in WTI crude oil (USOIL) has been slowing as the instrument approached support at $43.00 in the prior week. The price point reflects prior lows set in the early month, and has held the instrument higher as a recovery attempt was seen today. A bullish break above Friday’s high during Asian trading triggered a broader recovery, and a high on the day was made at $44.12. Gains were not sustained, however, as sellers drove prices lower into the European close, near the day’s open.
The US Dollar index (DXY) posted strong gains on Friday following a positive surprise in CPI data. The index closed the day out near its 200-period daily moving average, and as a catalyst was lacking for further gains in the new week, DXY retreated lower. The decline was met with support at 95.64 referencing highs from the prior week ahead of the breakout, and the index was last seen trading at 95.84 for a small loss of 0.21% on the day.
USD/CAD was under pressure during Asian trading as the recovery in oil prices weighed on the exchange rate, but bounced from prior support at 1.3142 in early European trading to recover, despite DXY continuing lower. The currency pair showed resilience in the recovery as the turn in oil prices occurred late in the day, while a steady rally has been seen in the exchange rate throughout European trading.
A weaker Loonie today has shown technical developments among the cross rates, as the recovery in EUR/CAD shows the pair on track to post a bullish hammer print on the daily chart following a two-day decline. The pair was last seen trading at 1.4745 after reaching a low of 1.4651 on the day. AUD/CAD was seen making a bullish break after consolidating near its 200 DMA for nearly one month. The consolidation is now seen as a base for a larger move to the upside.
While the recovery in USD/CAD today has erased a bulk of the losses seen since this week’s open, the current range is expected to continue as oil prices remain near significant support and DXY shows resistance overhead. The focus in USOIL will remain on the $43.00 price point, and a break lower stands to provide follow through for further upside in USD/CAD. The 200-period daily moving average in DXY is expected to hold the index lower, while Wednesday’s FOMC meeting carries the potential for a bullish break. Upside resistance in the exchange rate is seen at 1.3215 reflecting late July highs and the weekly open. While support remains at 1.3142 as the level has already triggered a bounce twice within the current range.
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BOC Poloz: Interest Rates Will Stay Lower For Longer
In a speech on Tuesday Bank of Canada Governor Poloz looked at the underlying forces acting on interest rates. The conclusion was that rates would stay lower for a longer than expected period, although it was not a permanent change and there were no specific short-term policy comments.
The text stated that recent bank research suggested that the neutral rate of interest rates has declined to a real rate of 0.75-1.75%. This translates into a nominal neutral range of 2.75-3.75% compared with a range of around 4.50-5.50% before the financial crisis.
According to Poloz, the Canadian economy is still facing strong headwinds, with a stimulative monetary policy needed to counteract these headwinds and push the economy closer to full capacity. Although the current policy is providing stimulus, it is not as powerful as could have been the case before the crisis. Any move to put rates back at 4.25%, for example, would represent extreme tightening and have significant consequences.
There was a repeat of September’s monetary policy report comments that inflation risks had tilted to the downside. He also commented, however, that the bank needed to watch the full effects of the government’s fiscal stimulus unfold.
The bank remains concerned over investment, with research suggesting companies are reluctant to increase capital spending even when facing capacity constraints, with reticence mainly due to uncertainty surrounding economic prospects. Poloz also suggested this may be due to unrealistic assumptions on necessary return rates.
Poloz called for additional structural reform measures to support underlying growth trends and also called for further trade liberalisation.
There were no specific comments on the likely short-term trends in monetary policy and the comments overall were broadly in line with other comments from major central banks over the need for structural reform to boost growth prospects.
The Canadian dollar remained on the defensive with USD/CAD close to daily highs at 1.3235, although this primarily reflected a fresh downward move in crude prices.
source
Canada July wholesale trade sales +0.3% vs +0.3% m/m expected
July wholesale numbers from Canada
August 2016 Canadian CPI 1.1% vs 1.4% exp y/y
Details of the August 2016 Canadian CPI data report 23 September 2016
USD/CAD forecast for the week of September 26, 2016
The USD/CAD pair fell initially during the course the week, crashing into the 1.30 level. That is obviously a large, round, psychologically significant number. That being the case, we ended up bouncing from this support barrier and formed a nice-looking hammer. I believe that the hammer suggests that we are going to continue to go higher, and a break above the top of that hammer would be a very bullish sign. At that point in time, I would anticipate that the market should then go to the 1.35 handle, and this is my basic a scenario at the moment. However, there is a lot of noise just above, so it might be difficult to deal with.
Oil markets of course will have quite a bit of influence on this market as it typically does, with the Canadian dollar being a proxy for currency traders when it comes to the commodity. I believe that the oil markets are looking very soft at the moment, and it is probably only a matter time before they fall. If they do, that should send the US dollar higher against the Canadian dollar going forward, and probably somewhat turbocharge the move higher. As you can see, we have been grinding our way higher, and an argument can be made for an ascending triangle. With this, it’s likely that the market will eventually do that, the question is whether or not it will do it anytime soon.Ultimately, I believe that the market will break above the 1.35 handle, but probably won’t happen right away. I think the pullbacks should offer plenty of support and potential value, at least as long as we stay above the 1.30 level. Ultimately, I believe that the “floor” is somewhere near the 1.2850 level below. With this, I believe that the buyers will return to this market again and again, and the pressure does seem to be building up for the potential breakout that could be coming any day now that the volume is back in the currency markets after the summer break season.
BOC’s Poloz Explains Relationship Between Trade and Monetary Policy
Globalization is having a direct impact on monetary policy, says Bank of Canada (BOC) Governor Stephen Poloz.
There is “evidence of increased trade integration when the definition of trade is broadened to embrace all the dimensions of international business,” Poloz said in prepared remarks at the annual Paul Storer Memorial Lecture on Canada-US relations at Western Washington University.
This evidence “is sufficient for monetary policy to take it seriously,” he added.
Canada and the United States share the largest bilateral trade relationship in the world and developments in the US have direct implications on the Canadian economy.
In terms of monetary policy, the Bank of Canada has remained on the sidelines since July 2015, when it cut interest rates by 25 basis points to account for a slowing economy resulting from the oil-price shock. Like dozens of other central banks around the world, the BOC is maintaining a highly accommodative stance on monetary policy.
Poloz has indicated previously that interest rates will remain lower for longer to account for domestic uncertainty.
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USD/CAD Crashes On OPEC Deal
Currencies traded quietly for most of the North American session until OPEC announced that it reached a deal to cut production. This is the first production cut in 8 years and it highlights the frustration that oil-producing nations feel about the 50% drop in crude prices over the past 2 years. With profits being squeezed, the battle for market share can’t go on and this deal ushers in a new period of cooperation between OPEC nations, specifically between Saudi Arabia and Iran. According to OPEC sources, production will be cut by 750k barrels to 32.5 million barrels a day. The cut won’t take place until November and a committee will be set up to determine the level of reduction for each member. Oil prices jumped more than 4.5% in response and the highly correlated Canadian dollar soared as a result. While we wouldn’t be surprised by some back peddling between now and November, this is a historic moment and one that should have a lasting impact on the Canadian dollar. We expect USD/CAD to drop to 1.3000, but see greater losses for GBP/CAD and NZD/CAD.
Meanwhile, the U.S. dollar traded slightly higher against all of the major currencies. Better-than-expected durable goods orders helped keep the greenback supported but at 0%, the stagnation in demand for big-ticket items is hardly encouraging. Instead, Wednesday's focus for U.S. dollar traders was Fed speak as comments were made by Fed Chair Janet Yellen and her Presidents Kashkari, Bullard, Evans and Mester. Yellen did not make a strong case for a rate hike. While she indicated that the FOMC majority sees a rate rise as likely this year, her cautious outlook and tone suggests that she may not be part of the group that is convinced a hike in December is necessary. She’s happy with the decline in the jobless rate but feels that economic growth has been disappointing, productivity growth has been exceptionally slow and most importantly, low inflation gives the Fed “some running room.” If inflation rises, her view may change but right now she isn’t seeing any upside pressure on prices and until inflation increases or job growth accelerates, Yellen would probably prefer to keep monetary policy steady and the current pace of stimulus in pace. Kashikari’s comments were consistent with Yellen’s cautious views as he said the base scenario is for slow and steady economic growth and the economy still has room to run before overheating. Bullard did not discuss monetary policy but Evans expressed similar concern about low inflation. Fed President Mester, who was one of the dissenting votes, explained that raising rates gradually will help prolong the expansion and she warned about risks from delaying the hike. Esther George speaks later this meeting and considering that she also dissented from the vote to leave rates unchanged last month, her comments should be hawkish.
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