While many volatility players were expecting the Bank of Canadas decision to hold rates and take a more dovish tone for the future to cripple the recent round of strength in the Canadian currency, it in fact fell to a more pessimistic employment figure later in the week. For the coming week, data on housing, trade and labor efficiency will keep fundamental traders busy. In the first few days of trade, housing data will take front stage.
After last weeks disappointing building permit release, indicators of housing starts and, more importantly, new unit prices will be hungrily digested by market participants to in effect take the temperature of the Canadian economy. Mondays release of August housing starts is expected to slow by 7,500 units, which would be a four-month low. Given recent data, such expectations seem reasonable. Ground breakings on new homes will be curtailed somewhat from the drop in the unemployment rate and due to diminishing optimism, the product of stalling wage growth and stubbornly high gasoline prices. The same reasoning stands behind the expectations for the previous months change in new home prices. Despite the predicted worse outcome for both reads however, the actual figure has potential to surprise to the upside. Any correlation in these two data sets to the building permits number released last week would be misleading since the latter was largely the result of a drop in industrial projects and not necessarily housing. Trade will be another major theme for the Canadian currency and its underlying economy. The international merchandise balance, the Canadian equivalent of the goods and services trade balance, is expected to grow over the July period. Much of this figure will be achieved through large rebounds in commodities. Crude oil prices jumped 15 percent from the month before to a record high above $78 per barrel, while copper surged 26 percent on demand speculation. Though things are looking up for lagging read, many traders will likely shrug off any positive shift as a stronger currency, cheaper crude and softening US demand in the following month would likely tame the trade account in the months ahead. Another interest set of indicators scheduled for the week are the second quarter capacity and labor productivity figures. Capacity constraints had been a large source for price instability in the opening months of the year, but moderate labor productivity figures and recent employment and wage numbers could indicate that pressures are not as great as originally thought. Should this be the case, the rate hawks in the market would quickly loose their most reliable validation for higher rates. Finally, wrapping up the data flow, the July new motor vehicle sales figure will give an advanced and approximate look into the following weeks retail sales numbers. Expectations run high with a mean 3.0 percent rise, but higher gasoline and a freshly marketed 4.25 percent overnight lending rate could prove this number too optimistic. All in all, the cut of the weeks data could take on a greater importance as the resolve the bulls had for keeping the loonie near 28-year highs begins to crumble away. Data will make its mark, as will spot commodity action.
Off to a slow start, Canadian traders didnt join the mass influx of liquidity in Europe last week until the conclusion of the holiday last Monday. When they finally came to their terminals, there was little to do with the Canadian dollar as it looked steadfast in its determination to hold the 1.1030 - 1.1135 range against the US greenback that dominated for the past couple week. Tuesdays price action took the Canadian dollar on its initial run for a test of the range top. This move was largely the product of US dollar positioning rather than loonie selling since the data flow had not yet been tapped. With Wednesday came the official data, and the first even was a memorable one. The Bank of Canadas policy meeting on the 6th stimulated a broad consensus among traders and economists. With the barrage of dour indicators that had battered the outlook of the Canadian economy in the previous weeks, many believed the central bank would respond in kind with their comments to suggest a rate cut could be looming on the horizon. This proved not to be the case, however, as the official statement suggested the economy was actually balanced and no change would be needed in the near term. In response to this news, the loonie shot higher on a relief rally, which weighed the USDCAD down 100 points. After the official start to the week, in terms of fundamentals, optimisms proceeded to fall of the cart. The first major bailing from the bullish camp came on reports of a 2.3 percent drop in building permits and an unexpected drop in the Ivey business and government spending read from 60.1 to 55.7. In line with expectations, the plunge in filings for construction was primarily due to a massive 48.7 percent contraction in industrial projects as a massive build up to a 17-year high pace buckled. Not expected, was the sizable decline in the Ivey number. No component was promising for purchasing managers as employment, inventories and supplier delivery gauges dropped while prices grew. This indicator started the loonie on its ultimate dive, but the real break didnt happen until the following day. On Friday, Statistics Canada reported Augusts unemployment rate ticked higher to 6.5 percent as Canadian firms laid 16,000 people. The more severe read was the net change, which was the largest drop in two years and the first incidence of three consecutive monthly drops since 1992. When looking into the data it became evident that the continued soaring of the manufacturing sector kept notching employment levels down, it was just a decline in other groups this month around that exaggerated it. By the close of the week, the USDCAD finished at 1.1200, leaving traders were eager to test the new bounds that would be formed in the coming days.
