Over the past week, any doubt that Canada was in fact moderating its aggressive pace of both growth and inflation was put to rest as economic indicators almost immediately began to back up the surprising decision by the Bank of Canada to hold steady with the current benchmark lending rate. The week ahead of the Canadian currency is peppered with only a few economic releases, though they could be well read by the market in determining whether the economy was really aching for monetary policy to facilitate growth and ease up on the battle against inflation.
With the open of Canadian capital markets on Monday, market worthy data will be close behind. Retail sales for May, expected to rise a meager 0.1% and 0.4% excluding vehicles and auto parts, will be the first data set for the market to absorb into its dynamic currency valuation. Aprils read of retail purchases was one of the soapbox indicators that economists and analysts rallied around when predicting for another quarter. The surprising 1.7% pace seen in April before, is not expected to follow the next month though as consumers had to pay less for gasoline and they likely controlled their spending habits on other goods as they try to build their accounts amid high energy and mortgage costs. The next indicator on the docket, Julys business condition orders, is not expected until Thursday. Manufacturing activity for the current month should find little improvement in the burdens that were holding it down in the previous quarters. An exchange rate that stubbornly remains near a 28-year high with its largest trade partner, unyielding raw material prices and the new effect of a possible slowing of growth in some of the biggest global economies could put the all factories in a tough spot and especially those that are dependant on exports. Rounding out the Calendar at the end of the week are the usual inflation duo of industrial and raw material price indexes for June. After receiving a boost from commodities like petroleum products and non-ferrous metals in the previous months price gauge, the same may be expected in June as most of the necessary goods rebounded strongly from the multi-month lows. However, many of the goods spent a good portion of the period declining in price and the low set could have provided some level of restraint for producers to absorb the costs. While there are some important reads for the month, market participants will not abandon the correlation the USDCAD holds with crude oil. Though the two have struggled to move in tandem over the past few weeks, the relationship still exists; and with liquidity low in the summer months and a lull in data by mid-week, there could be a quick reaction to the developments in crude.
As the support for the Canadian currency seems to have all but disappeared, the floor has yet to fall away. Last weeks price action was able to keep to its new range between 1.1260 and 1.1400 just north of the previous, two-month channel of 1.0975 and 1.1260. With the sentiment over the Canadian economy and currency turning sour, the units ability to hold near its 28-year high against the US dollar could signify a powerful demand for the loonie or perhaps a fleeting one that is in the throws of sputtering. One oddity with the action of the pair was its reaction, or general lack thereof, to the wild swings in crude oil. Crude prices had surged to $78.40 the previous Friday and had spiraled into a steep sell off in the opening days of the week. While the pair reflected this somewhat, it was nowhere near the extreme of the commodity. The other reason the currency is anomalous is because of its resiliency to the economic releases. While there were bullish signals from both international securities transactions and wholesale sales, these were lesser indicators and volatile in their own right. Net foreign investment in Canadian assets soared C$5.721 billion in May on strong purchases of debt. However, as the end of the rate regime and the sudden decline in stocks in later months catches up with the read, this strong number should abate. Also the strong boost in wholesale sales on auto purchases through May will be overshadowed by the more important retail sales figure, which shows a more direct relationship with the consumer. The crux of the week was Fridays CPI reads. Inflation had ballooned to 2.8 for the headline annual gauge and 2.0 for the core gauge in May, providing the best support for a potential rate hike in the future bar none. With this indicator, the BoCs decision to halt rate hikes was still lightly felt. However, in June, the fell away as the headline, yearly rate slowed to a more stable 2.5 percent and the core shrank to 1.7 percent. With fewer influential indicators and events sustaining what some would consider an overextended exchange rate, the USDCAD will have a harder time to fight any further down without slowing the economy.
Al Bawaba
