A light release slate this week did little to help the Canadian dollar, as strength in the currency was mostly the driven by cross boarder weakness. The USDCAD pair traded as high as 1.1460 on Monday morning before easing considerably in the following days, hitting a low of 1.1288 on Thursday morning and retesting that level Friday.
Looking ahead to next week, Monday holds the monthly report of gross domestic product, this time for May. Economic expansion is expected to accelerate 0.2% from 0.1% in April, marking the eighth monthly improvement following Septembers corrective drop. On a longer basis, first quarter growth showed a 3.8% rate, while second quarter growth is expected to remain strong but slightly more subdued at 3.1%. Strong growth in the service sector, coupled with an increase in manufacturing shipments, has helped to keep the Canadian economy strengthening. Fluctuations in oil prices could have a major impact in the coming months, however. After a drought of data in the middle of the week, Friday will reveal employment data and the Ivey PMI. Unemployment for July is expected to remain at the all-time low of 6.1% pegged since May of this year. Looking to the expected 25,000 new jobs, the bulk is expected to be in the service sector, which, as noted above, is booming, while manufacturing, despite an increase in shipments, is expected to contract. The improvement follows the 5,000 job loss in June, which was a normalization effect of Mays 96,700 addition. The Bank of Canada may take the higher employment rate into consideration as it ponders future rate decisions which have all but been taken off the table. A closer look at employment shows three consecutive monthly declines in average wage rate and a moderating year over year wage growth rate. However, should unemployment remain at current low levels or decline even further, upward pressure will be felt on wages and inflation may soon follow. Finally, the Ivey business activity read is forecast to drop from 62.2 to 53.0 for July, due largely to seasonal shifts. Despite the contraction the number will still remain net positive for the seventh straight month, further evidence of the strong domestic economy in the worlds eighth largest nation. Unfortunately, the number is not seasonally adjusted and has historically fallen in July and is not a very strong indicator for actual economic conditions for the month. Further, the number has tended to recover to give a better indication the following month.
Loonie price action, as noted above, found little action on the merit of its own fundamental offerings. The lone exception may have been Mondays retail sales data, which showed an unexpected 0.6% drop in May against revised 1.9% growth in April. Shortly after the release USD/CAD shot up to the weeks high of 1.1460, before retracing later in the day. Thursday saw the release of Business Condition Orders for July, which posted a firm improvement to 4.0 against -6.8 expected and a revised -4.0 the month prior. Activity in Canadas business sector will be closely watched in the months ahead as a reliance on the exports market will be shaky at best. With an exchange rate near a 28-year high against the currency of its largest trading partner, demand for Canadian goods will be worse off as global economies show initial signs of cooling. Domestic companies on the other hand are expected to spend their recent commodity revenue on machinery and skilled labor, which could spur a supportable domestic growth base. Skipping over a volatile mid-week that was the product of cross currency news releases, mainly those from the United States, Friday offered the final reads for the week with an inflationary theme. June reads of the producer price and raw material indices both came in below expectations and further supported the BoC in its decision to hold lending rates steady as economic and price growth moderate. Factory gate prices for the month declined 0.4% versus predictions of a 0.1% increase, while the raw material basket plunged 2.5% versus expectations of a 0.5% drop. Both of these upstream price gauges added weight to the previous weeks surprising contraction in core and headline reads of CPI. With growth figures and inflation figures showing little need for taming, the Canadian central bank has reason to stay put for some time.
