The only hope for the loonie is renewed speculation that the Bank of Canada will again raise its lending rate. First up this week from the economic front is the capacity utilization rate for the first quarter. The release is only expected to gain 0.1 percent to a reading of 86.4 percent. The slower acceleration of capacity usage will signal that rate hikes are beginning to have the desired cooling affect on the economy. However, the utilization rate still appears to be very high, possibly indicating that the Bank of Canada has not done enough to keep the economy from bumping up against full capacity and aggravating inflation another indicator that could fuel the potential for another hike. The final two releases will cut the week short on Wednesday, and both are forecasted to be disappointing. New motor vehicle sales for April are expected to have fallen by 1 percent as higher fuel and financing costs discourage buyers. Similarly, manufacturing shipments are also expected to have dropped in April by 0.4 percent. After a rebound of the manufacturing sector in March, shipments look to be falling back a bit, correcting from the huge increase due mostly to orders in the aerospace industry and the volatile and price-driven petroleum industry.
<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
The loonie ran out of steam last Monday due to heavy selling pressure after 3 weeks of gains and a retrace in copper prices. The following day, the currency experienced much of the same as Canada produced two conflicting releases. Building permits during April were expected to fall only moderately but actually dropped by 10.6 percent. Given that the March rise of 6.3 percent was the highest on record, a fall was not unexpected. Additionally, the indicator reported a slowing of the construction sector. However, officials indicate, despite the drop, that the construction sector is actually showing healthy growth overall. Despite this, the shock of the heavy drop sent traders into a sell-off of the loonie. Cutting the negativity short, the tremendously positive Ivey purchasing managers index was released 2 hours later. The hefty figure posted was able to stop the selling but could not translate into a further rise for the currency. Mays Ivey PMI, which was expected to rise 2.3 points to 58, actually posted a reading of 75. The primary contributors to the exceptional gain were the employment and price indices. Specifically, the price index eased indicating that input prices were falling a bit, putting less pressure on company budgets. This fact however may have pared gains to the loonie as it further hurt the chances of another rate hike by the Bank of Canada. The next releases were not until Thursday. Housing starts fell 0.5 percent during May to 216,800, against expectations of a rise. Suggesting a cooling of the housing market, the foundation for this shift was the rising price of new homes and higher borrowing costs discouraging mortgages. Conversely, the new house price index rose more than twice as much at expected by 1.2 percent during April. Additionally, labor productivity grew by 0.5 percent in the first quarter of 2006, exactly half that of the United States. These disappointing releases were compounded with a sharp fall in oil prices to below $70 per barrel on the death of al-Qaida leader Abu Musab al-Zarqawi. The combination of the abovementioned caused a 115 pip drop in the single unit. The currency recovered in no time however as incredible unemployment numbers were released the following morning. Mays unemployment rate was released at a 31-year low of 6.1 percent, down from 6.4 percent the month prior. Companies hired 96,700 workers, almost 5 times more than expected. This prompted speculation that the BoC may need to raise rates again which caused led to a nearly 150-pip rally and allowed traders to ignore the slightly disappointing international merchandise trade release that followed. The trade figure released printed at C$1.4 billion lower than expected at C$4.1 billion.
