The Canadian dollar weakened today after the decline of the U.S. consumer confidence and the decreasing prices for commodities damped the appeal of the currencies tied to growth.
The Conference Board’s index of the U.S. consumers’ sentiment dropped to 50.4, compared to the median forecast of 51.3. The Standard & Poor’s 500 Index declined 0.3 percent. The S&P 500 rose previously by 0.5 percent and gained more than 8 percent since June 30th, while crude oil went up 2.7 percent.
Previous gains encouraged the traders to perform profit taking, curbing the equities and the oil prices, which also affected Canada’s currency. The rebound is possible, but some analysts point out that that fundamentals and technicals signal about further decline before recovery.
USD/CAD rose to 1.0360 form 1.0320 as of 18:41 GMT today after it tumbled as low as 1.0255. EUR/CAD rose to about 1.3456 from the opening level of 1.3405.
The euro surrendered an 11-week high against the dollar after better-than-expected U.S. home-prices data helped the greenback recoup some its earlier losses.
The S&P/Case-Shiller home price index for 20 major U.S. cities rose 4.6% in May versus year ago, beating analysts' expectations for a 4.1% rise. The data sent the dollar to an intraday high against the yen. The euro dipped below USD1.30 to trade at a slight loss on a day after the data.
Currencies closely tied to the pace of global growth, such as the Australian and Canadian dollars, rode the coattails of improved investor sentiment, gaining on the greenback as worries over the euro-zone's sovereign-debt crisis fade to the background - at least for now - as a steady stream of solid global economic data come into focus.
The U.K. pound also gained to its highest level since February after U.K. retail sales posted their strongest growth in three years, smashing through economists' expectations.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 82.120 from 82.022.
Earlier euro-zone data sent the safe-harbor dollar to its lowest level since May against a basket of its competitors. The euro gained to its highest level in 11 weeks, ticking to near USD1.3050 before surrendering its gains on the heels of the U.S. home prices data.
Market expectation
Important resistance is seen for the pound near USD1.5560, which is near the 200-day moving average and also marks the 50% retracement of the down move from the November highs at USD1.6880 and the low this year near USD1.4230, said traders.
A run toward USD1.5900 is possible if the pound can press through USD1.5610, which marks a 61.8% retracement of the down move from USD1.6460 to USD1.4230, they said.
The Canadian dollar went up today against its U.S. counterpart as the gains of the U.S. equities and the improving conditions on the U.S. housing market bolstered the currencies tied to the growth, including the loonie. The Canadian currencies declined somewhat versus the euro.
The Standard & Poor’s 500 Index rose by 1.1 percent. The futures for crude oil, main Canadian export, traded near $78.99 per barrel after touching $79.30 per barrel on July 22, the highest level since May 5 on a closing basis. The new home sales in the U.S. reached 330,000 in June, compared to the median forecast of 317,000.
The Canadian dollar tends to move according to the commodity prices and the risk appetite. Today the appetite for the risk was definitely present at the markets.
USD/CAD reached 1.0322 today as of 22:17 GMT after it opened at 1.0372. EUR/CAD currency pair went up to 1.3402 from the opening level of 1.3377.
* Fed Chairman Bernanke delivers semi-annual testimony to Congress, in which he noted uncertainty in the economic outlook but stuck to his guns in continuing to prudently plan the ultimate withdrawal of the extraordinary monetary accommodation. * Chatter of U.S. double-dip recession remains in the headlines. High frequency and leading indicators do support a slowdown, but the indicators are nowhere near levels required to flash a re-entry into a recession. A mid-cycle slowdown remains the most likely outcome. * No sign that the housing market is breaking free from the doldrums. Starts slip more than market expectations, and while existing home sales beat market expectations, they still backtrack by 5.1% in June. * In Canada, markets were unscathed by the widely anticipated 25 basis point rate hike by the Bank of Canada (BoC). Reactions, however, followed the ensuing dovish BoC communiqué. * BoC affirmed that fiscal austerity measures relating to the European sovereign debt crisis appeased the risk of an adverse outcome and lifted the likelihood for sustainable long-term growth, but the global economy will recover at a more moderate pace than previously anticipated. The BoC observed that the Canadian economy has largely developed as anticipated, except for growth in business investment which seems to be constrained by uncertainties surrounding the global outlook. * We expect a protracted renormalization of the overnight rate, with gradual hikes of 25 basis points through the latter half of 2010 and 2011, albeit interrupted by occasional pauses. The overnight rate should reach 1.25% and 2.50% by the end of 2010 and 2011, respectively.
UNITED STATES - THE BATTLE OF WORDS
When Fed Chairman Bernanke delivered his semi-annual testimony to Congress on Wednesday, equity markets sold off on trepidation that the speech did not address or make a case for additional monetary stimulus. Rather, the central banker noted that "the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation." The market reaction was curious in many respects, because the US economy is already one year into an economic recovery and rates remain at record lows alongside a bloated Fed balance sheet. What more can be expected of the Fed? Shouldn't we be thinking of monetary withdrawal, the potential for persistent low rates to fuel bubbles in other areas, and unacceptable inflationary pressures taking hold one to two years out? The problem rests with the market perception that the recent slowdown in some economic indicators could be a harbinger that the US economy is headed for a double dip. Before addressing this possibility, there must first be an understanding on what a 'double dip' actually means. It is not a mid-cycle slowdown, such as real GDP growth downshifting from an average annualized pace of 3.5% over the past three quarters to a 1-2.5% range, which is what we believe is actually occurring. Rather, we take a double-dip to refer to broad-based weakness, marked by a contraction in domestic demand indicators, such as industrial production and private sector jobs. In other words, a return to a recessionary period, like that which occurred over the 1980-1982 period.
So, are the economic indicators pointing to a double dip recession? No. High frequency and leading indicators do support a slowdown, but they are nowhere near levels required to be flashing a re-entry into a recession. The manufacturing ISM index stands firmly in expansion territory at 56.2 - which is even above its long term historical average. An index in excess of 42 generally indicates an expansion of the overall economy and, at the very least, it would have to drop towards the 46 level to be consistent with historical signals of when the US economy was nearing (but not yet in) recession. Private sector hiring is proceeding at a snail's pace relative to any economist's preference, but it is proceeding nonetheless. Since the 1960s, a recession has always ensued when the 6-month annualized change of private sector employment was decelerating and went as low as 0.6%. Currently this is not the case, the trend is accelerating and is well outside this danger zone at 1.1% - but this is a great indicator to keep an eye on in upcoming payrolls data. As an aside, the nearly 400,000 temporary workers hired since the end of the recession certainly speaks to the ongoing cautiousness of corporations, but not their disdain to hire. Temporary workers are a leading payrolls indicator, which is still flashing a green light for the expansion.
I could go on through a list of other leading indicators, but since word space is at a premium, I would rather discuss one other possibility tied to the last point made. An alternative to the double-dip recession is what is referred to by the NBER as a 'growth recession'. This is when the economy is expanding but not at a pace that prevents the level of unemployment from continuing to rise. Although the post 2001 period was not officially marked as a 'growth recession', the job losses that ensued in the 19 months following that recession would have made that expansionary period still feel like a recession to many Americans. With firms having hired nearly 600,000 workers since the start of this year, the US economy currently does not satisfy this definition. However, among the various downside risks to the base case mid-cycle slowdown, it seems more probable that an over-cautious business mentality could bleed back into private sector job losses rather than we end up in a position of a double-dip recession. If the former were to occur, however, the Fed would likely be wary about adding in more stimulus in an economy that was still expanding and already had record amounts of monetary stimulus, as it could create problems elsewhere in the domestic or global economy... like investors taking inappropriate risk in search of yield... been there, done that.
CANADA - THE BANK OF CANADA TIPTOES THROUGH RATE HIKES
Attention centred this week around the Bank of Canada's (BoC) overnight rate announcement on Tuesday and the subsequent release of its quarterly Monetary Policy Report (MPR) on Thursday. While markets were unscathed by the widely anticipated 25 basis point rate hike, reactions followed the ensuing dovish BoC communiqué.
The BoC pointedly characterized the global economic recovery as one that is "not yet self-sustaining". It stressed that while the fiscal austerity measures relating to the European sovereign debt crisis appeased the risk of an adverse outcome and lifted the likelihood for sustainable long-term growth, the global economy will recover at a more moderate pace than previously anticipated. Moreover, it noted that growth in U.S. private demand, while picking up, remains uneven. The BoC affirmed that the Canadian economy has largely developed as anticipated, except for growth in business investment which seems to be constrained by uncertainties surrounding the global outlook. Going forward, business investment and net exports are now expected to contribute more significantly to growth.
All said, the BoC downgraded its real GDP forecast for 2010 and 2011 by 20 basis points relative to its April MPR (from 3.7 to 3.5 per cent in 2010 and from 3.1 to 2.9 per cent in 2011). Our forecast is slightly more pessimistic as we forecast a stronger Canadian dollar (and hence, weaker net exports) and a weaker contribution from consumer spending. While the BoC's downward revision in forecast growth may seem insignificant, it is projected to delay the closing of the output gap by two quarters, to Q4/2011.
The BoC statement cautiously concludes that "any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments", thereby leaving the door open to an interest rate pause if conditions warrant. The marginal increase in the overnight rate can be expected to have limited economic consequences beyond raising the cost of borrowing on variable rate loans. Longer-term borrowing costs (for example, on a 5-year mortgage) have actually retreated since May, thereby reducing associated debt service costs.
We expect a protracted renormalization of the overnight rate, with gradual hikes of 25 basis points through the latter half of 2010 and 2011, albeit interrupted by occasional pauses. The overnight rate should reach 1.25% and 2.50% by the end of 2010 and 2011, respectively.
The release of the BoC communiqué brought about a temporary appreciation of the CAD vis-à-vis the USD. This was reversed in short order on Wednesday following U.S. Fed Chairman Bernanke's testimony before Congress stating that the "economic outlook remains unusually uncertain".
This week's data releases for Canadian retail sales and the Consumer Price Index (CPI) echoed the BoC's cautious tone regarding the economic outlook. In real terms, retail sales posted a M/M gain of 0.4% in May, largely supported by weaker prices. Meanwhile, the core measure of CPI decelerated to 1.7% in the twelve months leading to June from a gain of 1.8% in May. The upcoming release of the monthly GDP for May next Friday will be closely tracked to gauge activity in Q2 and the extent of the economy's deceleration from 5-6% growth of the previous two quarters.
U.S.: UPCOMING KEY ECONOMIC RELEASES
U.S. Real GDP - Q2/10
* Release Date: July 30/10 * Q1 Result: 2.7% Q/Q ann. * TD Forecast: 2.1% Q/Q ann. * Consensus: 2.5% Q/Q ann.
The slowdown in economic growth following the stimulus and inventory driven recovery came a quarter earlier than expected. After average growth of 3.5% over the last three quarters (all rates annualized), real GDP growth is expected to have slowed to 2.1% in the second quarter of 2010. Much of the slowdown is attributable to a deceleration in consumer spending growth from a rate of 3.0% in the first quarter to just over 2.0% in the second quarter. Retail sales at the outset of the quarter were given a boost by strong spending on building materials, but this wore off quickly and retail sales declined outright in both May and June. Similarly, the homebuyer's tax credit contributed to rising home sales at the outset of Q2, but this too reversed course as the quarter closed out. Business fixed investment, and especially spending on equipment and software, stands out as the one major bright spot for the quarter, increasing by close to 20%. The rebound in machinery investment comes after an unprecedented decline that has led the stock of capital goods to fall over the last three quarters. On the whole, final domestic demand likely had a fairly good quarter, increasing by close to 4.0%, mostly due to growth early on. Nonetheless, as the trade data revealed, much of this demand went to foreign producers. Import growth is expected to be more than double the pace of export growth, leading net-trade to subtract close to 2 percentage points from real GDP in the quarter. Peering into the second half of this year, expect much of the same - growth to continue but at a not quite satisfying pace.
The pace of economic activity in Canada has clearly decelerated from the blockbuster rate set during the first quarter of the year. This was to be expected, as one must go back to the heady days of the tech boom to find as rapid of a six month growth rate as we enjoyed through the end of 2009 and into 2010. Alas the release of April's GDP report, which showed economic activity screeched to a halt, was perhaps a bit too shocking of a deceleration. Looking over the recent spate of soft data, we approached our forecast for May real GDP with some trepidation. Although the nominal growth rate for manufacturing shipments and retail sales were on the weak side, we credit subdued price pressures for supporting their constant-price counterparts. So we anticipate that the service sector will help underpin a 0.1% increase in real GDP in May. When we build out our quarterly forecast, the impact of the slowdown through the first two months of Q2 will make it difficult for the annualized growth rate to exceed 3.0%. This is broadly in line with what the Bank of Canada expects and is consistent with our expectation for a gradual economic recovery over the balance of the year.
The Canadian dollar managed to grow this week and almost recovered from the last week’s losses against the U.S. dollar, as the the global stock markets gains combined with an excellent dynamics of the crude oil pushed CAD.
The currency also rose against the euro despite a strong support for the latter from the stress test speculations. While the Canadian stocks performed quite well during this week (S&P/TSX rose by about 1.31 percent), crude oil, Canada’s main export commodity demonstrated a weekly gain of 3.12 percent, providing even more ground for the CAD’s growth.
Last week’s loss was inspired by the comments of the Canada’s central bank, stating that the low inflation probably won’t require more rate hikes in the future, reducing currency traders’ expectations for the rate difference speculations. Analysts believe that the current situation isn’t that good for the loonie, as without the support from the Bank of Canada it will now depend completely on purely speculative entities — oil and stock prices.
USD/CAD fell from 1.0571 to 1.0348 or 2.11 percent this week after rising by 2.39 percent last week. EUR/CAD declined from 1.3635 to 1.3374.
(Reuters) - The euro slipped against the dollar and the yen on Friday after a newspaper said several Spanish savings banks failed tests to see how they would cope with worsened economic conditions.
The euro hit the day's low of $1.2861 on trading platform EBS after Spanish newspaper El Pais reported on Friday that several of the country's 18 savings banks have failed the so-called stress tests.
But losses were limited in the single currency, which jumped more than 1 percent against the greenback on Thursday, as many investors awaited the official test results at about 1600 GMT (12 noon EDT).
The euro has support at about $1.2720, an interim high from July 9 set during its recent rally from a four-year low, and is consolidating at $1.2720-1.3030. A break above that band could see it testing $1.3090-1.3125, chartists say.
But traders said the euro was unlikely to re-test this week's 10-week high of $1.3029 just yet nor fall sharply ahead of the stress test results, which could move other currencies as well.
Traders have been betting most of the 91 European banks being examined will pass. Analysts say if there are no ugly surprises, that will be euro supportive, although some are skeptical about the severity of the checks.
"Unless test results show a surprisingly big number of banks needing surprisingly large amounts of money to mend their health, the results are expected to be euro supportive," said Jun Kato, senior manager of the investment department at Shinkin Asset Management, adding that there was no sense of panic following the Spanish newspaper report.
Euro bulls bet the euro could extend its rally partly on dollar weakness due to concerns the U.S. recovery is faltering. Below-forecast economic data has fanned fears about a slowing economy, prompting investors to dump long dollar positions.
For chartists, the $1.3090 target area is a spike higher on May 10, while $1.3125 is the 32.8 percent retracement of the euro's fall from its November high to the four-year low marked in June.
But bears bet the euro rally could lose steam, pressured by selling against currencies with higher interest rate prospects, such as the Australian and Canadian dollars.
Chartists say a breach of $1.2720 support could be the first warning of a deeper retracement from its 10-week high.
Euro/dollar 1-month risk reversals, a measure of currency sentiment, showed a bias for euro puts. Traders said that partly reflected speculation the euro may start falling sometime after the test results.
Data from broker ICAP shows euro/dollar 1-month risk reversals at 1.35/1.85 percent, around the highest in more than three weeks.
The yen has been under pressure after data on Thursday showed surprisingly robust growth in European manufacturing and services, and after strong earnings from U.S. blue chips such as 3M (MMM.N) and Caterpillar (CAT.N) rekindled hopes for the global economy and improved investor appetite for risk.
The euro was flat at 112.07 yen, having risen about 0.9 percent on Thursday. It fell to the day's low of 111.73 after the Spanish newspaper report.
The dollar edged up 0.2 percent to 87.09 yen, staying above a seven-month trough of 86.27 yen struck on trading platform EBS late last week. The greenback dipped 0.1 percent against the Japanese currency on Thursday.
(Additional contribution by Reuters FX analyst Rick Lloyd in Singapore and Krishna Kumar in Sydney; Editing by Charlotte Cooper)
The euro gained strongly against the dollar Thursday as better-than-expected euro-zone economic data helped soothe investor sentiment that had been dented by Federal Reserve Chairman Ben Bernanke's day-earlier downbeat assessment of the recovery.
Disappointing U.S. jobs figures Thursday failed to take the shine off currencies closely tied to the pace of global growth, such as the Australian and New Zealand dollars, which each gained more than 1% against the dollar on the improved sentiment.
The number of U.S. workers filing new claims for unemployment benefits rose last week by more than expected, reversing declines posted the prior week and signaling there is still little improvement in job market conditions.
EURUSD hits intraday high, at USD1.2886 from USD1.2763 late Wed, ahead of US leading indicators and existing home sales.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 82.754 from 83.291.
The Canadian dollar is higher along with other risk-oriented currencies Thursday morning, but has ceded much of its gains in recent trading after disappointing domestic retail sales data for May.
The U.S. dollar was at CAD1.0464 early Thursday, from CAD1.0482 late Wednesday.
Market expectation
Bernanke testifies to the U.S. House at 9:30 a.m. EDT, though analysts said they expect what he says to differ little from his talk to senators.
But a continuing stream of weak U.S. data also could emphasize the Fed's downbeat assessment of the U.S. recovery that it is continuing, but at a slower pace which could benefit the dollar, as nervous investors flock to the perceived safety of the dollar in times of market stress.
While the euro benefited from the better-than-expected European data released Thursday, investor eyes will be on Friday's release of the results of the stress tests of European banks. If the tests are seen as not stringent enough or if the results are particularly bad the euro could drop, analysts said.
Skepticism about EU stress tests and soft auction results across the euro zone have likely frozen the EURUSD recovery attempt above USD1.30 in the near term, say analysts. Investor nerves to drive trading Thu, the analysts said, but said only a break below the technical barrier of USD1.2690 would spark aggressive euro selling.
Tuesday was dominated by the Bank of Canada rate announcement and some downbeat U.S. housing data.
The central bank hiked interest rates by 25bps to 0.75% as expected. In its statement, the central bank said that European economic developments are positive in the long term but will hurt short-term growth. The BOC added that U.S. “private demand is picking up but remains uneven”.
Turning to the domestic economic, the central bank said that it is “unfolding largely as expected” but that business investment “appears to be held back by global uncertainties.”
Further rate hikes will have “to be weighed carefully against domestic and global economic developments”, according to the BOC. In short, the central bank’s outlook was more cautious than at its previous meeting.
The Canadian dollar weakened on the back of the uncertainty in the BOC’s outlook. However, within a couple of hours the currency had pared its losses.
Meanwhile, in the U.S. some very downbeat housing data was released. Housing starts fell to 549k in June, exceeding the consensus call for a drop to 580k from May’s 593k level, which was revised down to 578k in the June report.
Risk currencies like the Australian dollar firmed against the U.S. dollar following the data’s release.
In addition, Australia’s currency was the G10 outperformer on Tuesday as risk appetite in U.S. stocks continued to gather in intensity. The S&P 500 settled a respectable 1.1% higher on the day at 1,083, just a fraction of a point below its intraday high.
Unsurprisingly, the yen was the G10 underperformer as its safe haven role unwound itself.
The euro lived a rollercoaster ride on Tuesday. EUR/USD hit a new 10-week high of 1.3029 in early trading following strong Irish, Spain and Greek government bond auctions.
However, the pair was unable to sustain its gains and weakened into the North American afternoon. Eventually, the euro became the only riskier major to incur losses against the U.S. dollar and was only underperformed by the yen.
The news flow has been light during Wednesday’s Asia-Pacific session. The Bank of Japan June 14-15 Board meeting’s minutes offered no surprises, with all members saying the central bank’s new measures will ensure price stability.
In addition, one Board member said that they saw some downside risk to the economic outlook for the second half of 2010.
The yen ignored the release.
The rest of Wednesday will focus on the minutes from the Bank of England’s monetary policy meeting of July 8 as well as testimony from Fed Chairman Ben Bernanke.
The Canadian dollar rose against all major currencies after the country’s central bank decided to increase the target overnight rate to 3/4 percentage point on its meeting today.
The Bank of Canada announced in its statement that the interest rate is increased from 0.50 percent to 0.75 percent today. Although this decision has been expected by the majority of the market analysts, the resulting positive effect for the Canadian dollar was rather strong — it rose significantly against the U.S. dollar, the euro and the Japanese yen.
Despite the fact that the growth of the Canadian economy is slowing down, the analysts believe that the Bank of Canada may continue increasing the rates for some time, as the rate of growth of the economic output is still one of the biggest among the developed nations. Canada is now a leader by rate hikes among the G7 countries.
USD/CAD went down from 1.0545 to 1.0491 as of 17:15 GMT today. EUR/CAD dropped from 1.3654 to 1.3533, while CAD/JPY showed a growth from 82.25 to 83.11 today.
The Canadian dollar was the only G10 currency to eke out a small gain against its U.S. counterpart on Monday. Supporting Canada’s currency were three factors.
First, crude oil prices rose by 1.1% over the course of the day to settle at $76.54 per barrel.
Second, economists unanimously expect the Bank of Canada to hike interest rates by 25bps to 0.75% at its meeting on Tuesday (decision released at 2:00 p.m. GMT; 9:00 a.m. EDT).
Finally, risk appetite made a tentative return to U.S. stock markets. The S&P 500 closed 0.6% higher after its heavy 2.7% fall on Friday.
However, every other risk currency weakened against the U.S. dollar on Monday as they consolidated their losses from Friday.
The euro, after rising just above the psychological barrier of $1.3000USD on Friday, flirted with that level on Monday but ultimately failed to breach it. EUR/USD touched as high as $1.2992USD before settling at $1.2942USD.
The G10 underperformer was once again the New Zealand dollar.
Economic data was in short supply on Monday. The medium-tier U.S. NAHB housing market survey was the only notable release.
It fell to a 14 level in July, exceeding calls for it to remain at the revised prior level of 16. However, forex reaction was fairly limited: the safe haven yen moved slightly higher.
In other news, Bloomberg reported that German lender Hypo Real Estate has failed the European bank stress tests.
The newswire cited two sources familiar with the results, which are to be released Friday. Hypo declined to comment.
The news flow has been slight during Tuesday’s Asia-Pacific session. Australian Treasurer Wayne Swan has told ABC Radio that the Labor government remains committed to its mining tax.
Tuesday’s remaining highlights include the aforementioned Bank of Canada rate announcement and U.S. housing starts and building permits.
The dollar dropped to its lowest level since December against the yen after disappointing U.S. consumer sentiment data added to a string of worse-than-expected economic data that brought the pace of the U.S. recovery into question.
The euro slipped below the USD1.30 level hit in earlier trading, but remained higher against the dollar on the day as concerns over the euro-zone sovereign debt crisis continued to fade to the background amid worry the U.S. recovery could be slowing.
The worse-than-expected measure of consumer sentiment was atrocious. Currencies closely tied to the pace of global growth, including the Australian and Canadian dollars, extended their sharp losses on the disappointing figure.
U.S. consumer-sentiment levels hit a wall as of mid-July and ebbed to levels last seen in March 2009, a report said Friday. The Reuters/University of Michigan preliminary consumer sentiment index for July hit 66.5, compared with 76.0 in June. It had been expected to stand at 75.0.
The dollar fell to a fresh seven-month low against the yen, at JPY86.27, as concerns over the pace of the U.S. recovery sent investors toward the traditional safe harbor.
Market expectation
The dollar is likely on course to fall to JPY85.00 within this month, traders said. That's because its Japanese counterpart is not only strengthening as a safe currency in the midst of a murky global growth outlook but also from multiple dollar-negative factors.
Among them are signs of deterioration in the U.S. economy, falling U.S. interest rates and expectations for extended U.S. monetary easing.
Investors appear to be gaining confidence in the policy measures that individual euro-zone governments have undertaken to address the crisis and rein in deficits, while Asian investors appear more comfortable taking on sovereign-credit risk within the euro zone, he said.
The European banks stress tests due for publication next week, however, remain the make-or-break challenge for the euro.
The Canadian dollar weakened today after the economic growth in the U.S., the biggest Canada’s trading partner, showed the signs of the slowdown, possibly reducing demand for the Canadian exports.
The Standard & Poor’s 500 Index went down 0.5 percent. The U.S. equities declined after the Federal Reserve Bank of Philadelphia’s index of the manufacturing activity slumped to 5.1 this month from the month before. The index still suggests growth, but has fallen for two consecutive months. Crude oil, the key export of Canada, dropped as much as 2.2 percent.
The Canadian dollars seems yet again to suffer from the outside influence, this time because of the close relations with the U.S. The meeting of the central bank’s policy makers, who would set the interest rates, scheduled on July 20th. The investors bet on 0.25 percentage point increase.
USD/CAD traded at 1.0378 as of 20:35 GMT today after it opened at 1.0324. EUR/CAD climbed to about 1.3432 from the opening rate of 1.3155.
Despite enthusiasm over the start of earnings season markets paired gains yesterday. Retails Sales in the U.S. came in lower than expected for the second consecutive month. Investors responded by sending equities lower. In the currency markets the Euro continued to head higher against the USD, explained by reasonably better macro data released by Europe.
Markets recovered during the mid NY trading session, just to pair gains again after the FOMC meeting minutes were published, eventually ending the NY session flat. Fed minutes released later revealed more concern over the economic recovery. The Fed stated that, for the time being, there is no need for new steps to boost the economy. However, in case the economy continues to slow, it might take the necessary measures to accelerate growth. Economic News
USD - Retail Sales and Fed Minutes Sent USD Lower U.S. Retail Sales and Fed Minutes released yesterday sent the greenback lower against its major counterparts. The EUR/USD pair continued the recent rally for another day. The rally gathered momentum as European macro data was better than the disappointing figures released in the U.S. The U.S. economy is signaling that the economic recovery may be slower than previously thought. The fed sees rising risks and growth at a slowing pace.
The U.S. Dollar is currently trading at 1.2750 against the EUR during early trading today.
Looking ahead to today, more macro releases will influence the greenback. Data is expected to be lower than previous months but in case economic growth is indeed slowing, data might turn even worse than expected. In this case the U.S. Dollar might continue to decline against its major counterparts.
EUR - Weak U.S. Figures Send Euro Higher The Euro continued its rally against the U.S. Dollar for the second day, although the pair traded higher most of the day it ended almost flat. The EUR reached $1.2776, thereafter it paired some of it gains, while concerns over the European economy remains.
The EUR remained almost unchanged versus the British pound. The EUR/GBP is currently trading at 0.8342, however the EUR traded lower against the Japanese yen currently at 112.58, as investors return to buy safer assets.
Looking ahead to today, there are no major news events to be released in Europe. Therefore U.S. macro data may influence investors' appetite for riskier assets. In case figures turn worse than expected, investors would continue to prefer the EUR and GBP over the greenback. The Japanese yen, unlike the USD, could turn stronger against the Euro and British pound, as it still considered a safer asset.
JPY - Remains a Safe Heaven Currency The JPY strengthened against the U.S. dollar as investors expressed their concerns about the U.S. economy by selling the U.S. dollar and buying the Japanese yen. The yen traded higher against most its counterparts, aided by lower likelihood of currency intervention from Japan's policymakers. It strengthened against the British pound, the euro the Canadian dollar and the Australian dollar.
Looking ahead to today traders should pay attention to the support line at 88.00. A below this level might take the USD/JPY pair even lower. Some analysts estimate that that the yen could even reach as low as 85 in the following months.
OIL - Worries about Double Dip Hit Crude Oil price Crude Oil price ended flat yesterday after Fed Meeting Minutes signaled slower growth than previously expected. Crude Oil traded higher above $78 before NY trading session only later to pare its gains after disappointing U.S. Retail Sales, declining further after the Fed published its monthly minutes.
Crude Oil prices have risen sharply since last Tuesday from $71.46, currently trading at $77.25. Having little effect on price, Crude Oil stockpiles decreased by 5.1 Million barrels according to the weekly EIA report published yesterday. Distillate stocks rose by 2.9 million barrels, analysts expected, on average a rise of 800K barrels.
Crude Oil prices may decline further in the short term if economic figures continue to deteriorate. Investors are worried about a possible double dip, or a renewed recession. The Fed at this stage will not take steps to accelerate the economy.
Technical News
EUR/USD Yesterday the EUR/USD rose as high as 1.2776 but found resistance at the upper line of the pair's rising price channel. The close was also above the resistance line at 1.2750 and the long term downward trend line that began in December of 2009. Traders may want to target the next resistance line at 1.3100. This level also coincides with a 76.4% Fibonacci retracement level from the pair's bullish trend in 2009.
GBP/USD The pair ran into technical resistance yesterday, rising to a high just shy of 1.5300. This price level is reinforced by the long term downward sloping trend line that began in July of 2008. The price level also coincides with a 23.6% Fibonacci retracement level of the same long term bearish trend. A breach of this price could send the pair to the resistance levels of 1.5380 and 1.5520 in the short term, with a long term target at 1.6425.
USD/JPY The brief bullish correction has ceased in the pair as yesterday the price fell to the support level of 88, the significant resistance level reached on the same day of the "flash crash". Falling momentum may push the pair lower as the 10-day Momentum Indicator is falling below the 100 level. The price has also failed to make a significant breach of the 20-day simple moving average. The next target for the pair could be the support of line at 87.
USD/CHF Yesterday the pair pulled back to the 61.8% Fibonacci level at 1.0610 before heading lower to the daily low set on Tuesday. A breach of the 1.0480 support level could send the pair lower towards the 76.4% Fibonacci retracement level from the previous bullish trend at a price of 1.3050.
The Wild Card Oil Rising prices have been accompanied by increasing momentum as the 14-day Momentum indicator is sloping sharply higher. Yesterday the price of the commodity rose to a high of 78.12 before falling back for a slight gain. CFD traders may want to continue to be long on spot crude oil with a near term price target of $80.
The euro extended its rebound Tuesday, erasing earlier losses to move ahead on the day against the dollar as U.S. stock markets appear poised to advance.
The common currency had already rebounded from its intraday lows against the dollar and the yen in earlier trading after a well received auction of Greek Treasury bills helped soothe investor fears about the euro zone's sovereign debt crisis.
The crisis had been brought back into focus overnight by ratings agency Moody's announcement it was cutting Portugal's credit rating two notches to A1.
During the North American session, investors' focus shifted to the positive tone in stock futures and the willingness to pursue riskier assets.
Other risk-sensitive currencies such as the U.K. pound and Canadian dollar also rose against the greenback in mid-morning trading.
The U.S. dollar has also slumped against the safe-haven yen as investors retreated from risk, but pared its losses in subsequent trading.
The euro had been pressured in earlier activity by a disappointing ZEW business survey from Germany. Instead of falling just to 26.0 from 28.7, the main sentiment index fell all the way to 21.2.
The pound was initially pushed lower by the shift away from risk but then found support after the latest U.K. inflation data proved a little more hawkish than expected. Although headline inflation fell as expected to 3.2% from 3.4%, core inflation rose to 3.1% last month from 2.9% in May.
Market expectation
Cable trades near the highs at USD1.5155/60, 0.84% above today's opening price and 200 pips above session lows after a strong reversal. The pair has approached to 10-week highs that lie at USD1.5240.
Testing USD1.5150 static resistance area, also base of the daily ascendant channel, pair shows strong bullish momentum according to 4 hours chart, thus a bit exhausted in the hourly chart.
Australia will release updated budget forecasts later Wednesday, partly to detail the impact of new Prime Minister Julia Gillard's decision to blunt a proposed tax on the nation's miners, a government spokesman confirmed Wednesday.
The government is currently forecasting the budget to return to surplus in the financial year beginning July 1, 2012.
The week kicks off with the final UK GDP statistics, followed by a speech from Fed Chairman Ben Bernanke, and the Bank of Canada’s senior loan officer and business outlook surveys.
GBP – 9:30 GMT: UK Final Q1 GDP (Q/Q) (Exp: +0.3% Prior: +0.3%) UK Final Q1 GDP (Y/Y) (Exp: -0.2% Prior: -0.2%) As the third and final look at Q1 GDP, this report will be less for the pound sterling. A better than expected number could help the currency, while a weaker one will hurt it.
USD – 15:00 GMT: Fed Chairman Bernanke Speaks at Small Business Forum When Bernanke talks, the markets listen, and recently the markets want to know when the Fed will hike its discount rate again, a development which will surely increase the value of the USD. In a broader sense, in the Fed Chairman seems inclined to hike rates sooner than later, expect the USD to rally. Also if Bernanke fails to affirm that rates will remain low “for an extended period,” expect the USD to rally.
CAD - 15:30 GMT: Bank of Canada Q2 Senior Loan Officer Survey (Prior: -18.7) Bank of Canada Q2 Business Outlook Future Sales (Exp: +35.5 Prior: +44.0) Another bout of unpredictable events for Canada, the Senior Loan Officer and Business Outlook surveys will be CAD -positive if they sound upbeat on the economy. The central bank has been optimistic for some time. A deviation from that line of thinking will hurt the currency.
July 13
The action heats up on Tuesday with the UK CPI report, followed by the ZEW economic index for Germany, the U.S. and Canadian trade balances, and kiwi retail sales.
GBP - 9:30 GMT: UK June CPI (M/M) (Exp: 0.0% Prior: +0.2%) UK June CPI (Y/Y) (Exp: +3.1% Prior: +3.4%) Inflation is the core mandate for the central bank, and the central bank has expressed some concerns about it running rampant down the road if left unchecked. Consequently, higher than expected readings could cause the pound sterling to take back some of its recent losses, while a weaker number raises the chance for the central bank to remain on hold for a longer period of time.
EUR - 10:00 GMT: German July ZEW Economic Sentiment (Exp: +25.3 Prior: +28.7) German June ZEW Current Situation (Exp: -1.2 Prior: -7.9) Although volatile and somewhat unpredictable, the ZEW survey correlates relatively well with the German Ifo index and is consequently a fair measure of growth for Germany. On the other hand, the ZEW surveys market participants only, so the index fails to take into account the health of the broader economy. Market reaction is usually short term, unless other economic data support its findings.
USD - 13:30 GMT: U.S. May Trade Balance (Exp: -$39.0B Prior: -$40.3B) Traders can use the U.S. trade statistics to fine-tune their positions but otherwise trade data is more affected by currency moves than vice versa. Nevertheless a widening of the deficit is USD negative.
CAD - 13:30 GMT: Canadian May International Merchandise Trade (Exp: -C$0.2B Prior: +C$0.2B) The strong Canadian dollar is allegedly going to wipe out a lot of the upbeat developments for the Canadian economy and should the country’s trade balance fall into deficit, it may scare traders into believing the loonie is overvalued.
NZD - 23:45 GMT: New Zealand May Retail Sales (M/M) (Exp: +0.5% Prior: -0.3%) New Zealand May Retail Sales Ex-Autos (M/M) (Exp: +0.6% Prior: -0.2%) As with most economic data, better than expected results should give a lift to the local currency, and this month’s report is no exception.
July 14
Wednesday’s highlights include the UK and Australian consumer confidence indexes and UK employment report, followed by euro zone industrial production and CPI, U.S. retail sales, and the FOMC minutes.
GBP – 0:01 GMT: UK June Nationwide Consumer Confidence Index (Exp: 62 Prior: 65) Another textbook economic indicator, a better than expected result should strengthen sterling, while a weaker number will hurt it.
AUD - 1:30 GMT: Westpac July Consumer Confidence (M/M) (Prior: -5.7%) Consumer confidence in Australia has been progressing steadily over the last several months and there is no reason to expect otherwise, with the economy recovering.
GBP - 9:30 GMT: UK June Claimant Count Rate (Exp: 4.5% Prior: 4.6%) UK June Jobless Claims Change (Exp: -20.0K Prior: -30.9K) The pound sterling has been ravaged by poor economic fundamentals in the UK and a poor employment report will add to the country’s woes. On the other hand, with so much sterling being sold in recent months an upbeat report might present a good buying opportunity.
EUR – 10:00 GMT: Euro Zone May Industrial Production (M/M) (Exp: +1.2% Prior: +0.6%) Euro Zone May Industrial Production (Y/Y) (Exp: +11.4% Prior: +9.6%) By the time these data hit, the German figures have already been priced into the markets, so reactions to this report are usually limited. That being said, large misses can have some effect.
EUR –10:00 GMT: Euro Zone June CPI (M/M) (Exp: 0.0% Prior: +0.1%) Euro Zone June CPI (Y/Y) (Exp: +1.4% Prior: +1.4%) As a second look at the euro zone CPI, this report could be overlooked unless it comes in stronger than the preliminary estimate. That being said, rising CPI is a positive for the currency.
USD - 13:30 GMT: U.S. June Advance Retail Sales (Exp: -0.3% Prior: -1.2%) U.S. June Retail Sales Less Autos (Exp: 0.0% Prior: -1.1%) U.S. June Retail Sales Ex Auto & Gas (Exp: +0.2% Prior: -0.8%) The U.S. consumer will be critical to the global economic recovery and until he/she starts spending again, true optimism cannot return to the markets. An upbeat reading will spark a U.S. dollar rally, while a poor number will likely cause a sell off. Retail sales have the potential to set the tone for the day.
USD – 19:00 GMT: FOMC Minutes The Federal Reserve continues to affirm that interest rates will remain low “for an extended period”, and the main focus will be whether or not any discussion was had to change the language. As long as the central bank remains content to keep things on hold, the USD shouldn’t react. On the other hand, if things are improving, it could be taken as a sign that rate hikes are coming, a development which would rally the USD.
July 15
Thursday offers a barrage of key economic data starting with the Bank of Japan’s interest rate decision, the Australian consumer inflation expectations, Chinese second quarter GDP, the nation’s inflation statistics and retail sales, U.S. jobless claims, PPI and industrial production, the Empire and Philly Fed manufacturing indexes, and Kiwi second quarter CPI.
JPY: BOJ Rate Decision Again, no one is expecting the Bank of Japan to modify its monetary policy any time soon, so the focus will remain on the economic and inflation assessments. Any signs that the economy is going better than expected could support the yen.
AUD - 2:00 GMT: Australian July Consumer Inflation Expectation (Prior: +3.4%) Inflation is a big part of the Reserve Bank of Australia’s mandate, so an increase in inflation expectations could boost the aussie dollar.
ALL – 3:00 GMT: Chinese Real Q2 GDP (Y/Y) (Exp: +10.5% Prior: +11.9%) As the first look at Q2 GDP, this report will be important for prospects of economic growth. Expect the USD and yen to sell off as risk aversions declines should the data come in better than expected and vice versa.
ALL - 3:00 GMT: Chinese June Producer Price Index (Y/Y) (Exp: +6.8% Prior: +7.1%) Chinese June Purchase Price Index (Y/Y) (Exp: +11.6% Prior: +12.2%) Chinese June Consumer Price Index (Y/Y) (Exp: +3.3% Prior: +3.1%) Inflation is becoming a concern in China so a faster than expected growth in prices will support the yuan and the USD by proxy.
ALL: 3:00 GMT - Chinese June Retail Sales Index (Y/Y) (Exp: +18.8% Prior: +18.7%) Chinese June Industrial Production (Y/Y) (Exp: +15.1% Prior: +16.5%) As long as Chinese economic growth remains strong, the view that the global economy is doing well persists. Any unexpected weakness in retail sales or production could spark risk aversion.
USD - 13:30 GMT: W/E July 10 U.S. Initial Jobless Claims (Exp: +447K Prior: +454K) The markets continue to expect lower jobless claims and failure to do so will most certainly cause a decline in the U.S. dollar, the magnitude of which will depend on the mood going into the announcement.
USD - 13:30 GMT: U.S. July Empire Manufacturing (Exp: +18.0 Prior: +19.57) Although volatile and unpredictable, the Empire Fed manufacturing index is the first piece of manufacturing data we get for the U.S every month, and an upbeat number is usually greeted with optimism. Look for the greenback to rally on a good reading.
USD – 13:30 GMT: U.S. June Producer Price Index (M/M) (Exp: -0.1% Prior: -0.3%) U.S. June PPI Ex Food & Energy (M/M) (Exp: +0.1% Prior: +0.2%) U.S. June Producer Price Index (Y/Y) (Exp: +3.1% Prior: +5.3%) U.S. June PPI Ex Food & Energy (Y/Y) (Exp: +1.1% Prior: +1.3%) The producer price index is used to predict the consumer price index in the United States, so market reaction will likely be limited as traders fine tune their CPI estimates.
CAD – 13:30 GMT: Canadian May Manufacturing Sales (M/M) (Exp: -0.5% Prior: +0.2%) Canadian manufacturing sales correlate with GDP, so a better than expected number should improve prospects on growth and consequently the Canadian dollar.
USD - 14:15 GMT: U.S. June Industrial Production (Exp: -0.1% Prior: +1.3%) U.S. June Capacity Utilization (Exp: 74.2% Prior: 74.1%) Another textbook example, any upside surprise here is good for the U.S. dollar. As a top tier report, the moves could be longer lasting.
USD – 15:00 GMT: U.S. July Philadelphia Fed. (Exp: +10.0 Prior: +8.0) More reliable than the Empire Fed index, the Philly Fed manufacturing report is likely to send the greenback higher if better than expected, particularly if the Empire Fed index supports its findings. On the other hand, a poor number could cause traders to scale back their USD-long positions.
NZD - 23:45 GMT: New Zealand Q2 Consumer Prices (Q/Q) (Prior: +0.4%) New Zealand Q2 Consumer Prices (Y/Y) (Prior: +2.0%) With inflation controls high on the central bank's list of priorities, an unexpected increase could lead to rate hike expectations and consequently a stronger kiwi dollar.
July 16
The week ends on the Japanese tertiary index, the euro zone trade balance, U.S. CPI and net long-term TIC flows, and the Reuters / University of Michigan consumer sentiment index.
JPY - 0:50 GMT: Japanese May Tertiary Industry Index (M/M) (Exp: -0.7% Prior: +2.1%) Right now, any suggestion that the Japanese economic recovery is proceeding more quickly than anticipated should weaken the country’s currency as risk aversion declines, although with the focus on deflation, growth data could be ignored.
EUR - 10:00 GMT: Euro Zone May Trade Balance SA (Exp: +€0.8B Prior: +€1.6B) After the German trade balance released last week, this data point is not likely have any lasting impact on the euro.
USD - 13:30 GMT: U.S. June Consumer Price Index (M/M) (Exp: -0.1% Prior: -0.2%) U.S. June CPI Ex Food & Energy (M/M) (Exp: +0.1% Prior: +0.1%) U.S. June Consumer Price Index (Y/Y) (Exp: +1.2% Prior: +2.0%) U.S. June CPI Ex Food & Energy (Y/Y) (Exp: +0.9% Prior: +0.9%) Inflation is not really on anyone’s radar for now so CPI is not moving the markets as much as usual. Nevertheless a quicker return to inflation will draw fire for the Federal Reserve. Any large upside surprises has the potential to send the greenback higher.
USD - 14:00 GMT: U.S. May Long-term TIC Flows (Prior: +$83.0B) U.S. May Total Net TIC Flows (Prior: +$15.0B) TIC flows are usually affected more by exchange rates than the contrary, but unexpected surprises can cause traders to adjust their positions. Large capital outflows from the U.S. are consistent with selling of the greenback.
USD - 15:00 GMT: U.S. Preliminary July U. of Michigan November Consumer Sentiment (Exp: +74.0 Prior: +76.0) As one of the earliest and more reliable readings on the state of the U.S. consumer, the preliminary Michigan report is likely to set the tone on consumption for the month. A bad reading will send the greenback lower, while a weaker score will spark a selloff in the currency.
* Financial markets showed some appetite for risk this week. Stock indexes posted significant gains across the globe, the US dollar lost ground versus its main trading crosses, and 10-yr Treasury yields edged above 3%. * In the U.S., initial unemployment claims were down 21K in the week of July 3; however, the declining trend in both initial and continued claims has decelerated sharply since April. * U.S. consumer credit declined by $9.1 billion in May. With household deleveraging unlikely to be a fleeting phenomenon, consumption growth will continue to be increasingly reliant on job and income expansions. * The Canadian labour market posted an astounding gain of 93,000 net jobs in June, pulling the unemployment rate decisively downward by two-tenths of a percent to 7.9%. * Total employment is now a mere 14,000 jobs away from its pre-recession level. * But, overall economic growth is expected to moderate due to a pullback in consumer spending and this will, in turn, moderate employment growth going forward. * Housing starts declined for the second consecutive month in June by 3.1%, after falling by 5.2% in May.
UNITED STATES - CRAVING GOOD NEWS
Financial markets showed some appetite for risk this week. Stock indexes posted significant gains across the globe, the US dollar lost ground vis-à-vis its main trading crosses, and 10-yr Treasury yields edged above 3%. Market sentiment was bolstered by the publication of details on stress tests being conducted on European banks, an upgrade in the global growth outlook by the International Monetary Fund (IMF); and in the United States, stronger than expected retail sales, a sharper than expected decline in initial unemployment claims, and improved prospects for second-quarter earnings.
Actually, if we look a bit deeper into the details for all those market movers, we could conclude that the storm clouds really haven't parted. Regarding European banks' stress tests, some fundamental issues have not been clarified yet. For instance, what would happen if some institutions appear undercapitalized under the light of the test results. It is not clear whether recapitalization will be mandated or if there will be government support. In the case of the IMF global growth forecast, the figure was upgraded 0.4 percentage points since April to 4.6% for 2010, and remained unchanged at 4.3% for 2011. However, the former reflects better than anticipated growth during the first quarter of this year rather than stronger momentum going forward. Moreover, the fact that downside risks were signaled by the IMF to have "risen sharply" also appears to have been ignored by the markets.
In the United States, initial unemployment insurance claims were indeed down 21K in the week of July 3. The 4-week moving average also came down, but just by a slight margin. However, the declining trend in both initial and continued claims has decelerated sharply since April, showing how difficult it has been for the economy to absorb the excess labor supply generated by the recession. If total claims continue to decline at the slow pace they showed during May and June, it would take roughly four years to return to pre-crisis levels.
Data on consumer credit was definitely not food for cheerleaders either. The aggregate declined by $9.1 billion in May. Credit declines have been the rule since August 2008, except for only three occasions. Total consumer credit outstanding sits at $2.41 trillion, and as a share of total personal consumption it stood at 23.6% at the end of the first quarter this year, compared to 25.3% in September 2008. With the deleveraging unlikely to be a fleeting phenomenon, going forward, consumption growth will continue to be increasingly reliant on job and income growth, and that is why improvement in the labor market is so critical to sustaining the recovery. Furthermore, if we look at overall credit growth, not just consumer credit, we see that despite the positive implications in terms of restoring financial stability, the monstrous liquidity injection cries by the Fed have been falling on deaf ears. This doesn't bode well for the prospect of further quantitative easing; a topic that has grabbed some attention recently given the fact that inflation keeps trending lower and the recovery is poised to lose steam over the second half of the year.
In this regard, it will be interesting to dissect the FOMC minutes for the June 23 meeting to be released next week. It will shed some light on the views of the members of the Board regarding the size of the balance sheet of the Fed and whether it has considered the possibility of further quantitative easing. Any expansion of the Fed's balance sheet will be subject to serious scrutiny. As Fed Governor Kevin Warsh recently put it, he "would want to be convinced that the incremental macroeconomic benefits outweighed any costs owing to erosion of market functioning, perceptions of monetizing indebtedness, crowding-out of private buyers, or loss of central bank credibility."
CANADA - IMPRESSIVE RIDE, BUT SPEED BUMPS AHEAD
This week ended with a surprising bang as Statistics Canada reported that the Canadian economy was "hiring" on all cylinders, adding 93,200 net new jobs in June. Equally split between the public and private sectors, this was the 3rd largest monthly gain on record and was an undeniably strong indication that the economic recovery here in Canada is leaving other G7 economies in the dust. In less than a year, the labour market has posted a net gain of 403,000 jobs and sits a mere 14,000 away from its pre-recession level, an astounding performance given that it typically has taken 6-11 quarters to recover losses in past Canadian recessions. The unemployment rate has fallen by 0.8 percentage points since last August and now sits at 7.9% as of June.
Unfortunately, "hiring" on all cylinders burns through a lot of fuel. The fact that the second quarter of 2010 is bookended by April's 108,700 job gain and June's 93,200 gain, the 2nd and 3rd largest monthly gains in employment on record, is most likely due to the fact that employment is almost always a lagging indicator during economic recoveries and this robust growth follows the equally robust growth in real GDP posted in the final quarter of 2009 and the first quarter of 2010. But the overall economy is now beginning to cool its engines. Perhaps most importantly, governments, which have been a leading source of employment growth during the early recovery, will likely hire at a considerably slower pace due to the pullback in stimulus spending. In addition, some cracks in the U.S. economic recovery are beginning to appear and this will create headwinds for export-oriented employers. Up to this point in the recovery, job growth has been dependent on domestic factors. In particular, Canadian consumers taking advantage of interest rates at their emergency lows have been the primary driver of economic growth, and in turn employment growth, with personal consumption expenditure contributing over half of real GDP growth in the last two quarters. Now, with debtto- income ratios reaching record levels, households will likely conserve fuel in the coming quarters and this will be instrumental in moderating real GDP growth in the latter half of 2010 and into 2011. This means that the outlook for employment growth will also moderate; TD Economics expects net new job gains to average a more moderate 15,000-25,000 in the coming months.
A slackening in household spending is likely to come hand in hand with weaker housing activity. The second major report out this week, which is already proving indicative of Canada's maturing recovery, indicated that housing construction declined for the second consecutive month. Housing starts declined by 3.1% in June to 189,300 after falling 5.2% in May. The housing market was the first sector in Canada to recover from the recession and so the maturation of the recovery in this sector provides us with some insight as to what we can expect from other sectors. In no other sector was the aforementioned trend of households taking a break after taking advantage of record low interest rates more apparent than in the housing sector. But the rapid recovery that characterized the housing market in much of 2009 is expected to turn course and contract in the second half of 2010 and in 2011; in fact, this is already beginning to occur in a few indicators such as existing home sales which have declined in four of the last 5 months. Though neither the labour market nor the overall economy is expected to follow suit with outright contractions of their own, the trajectory of the housing market does act as a harbinger of cooler economic growth in the months to come.
Add it all up and job gains are likely to track economic growth lower. Real GDP growth is expected to moderate from the 5-6% annualized pace recorded in the last two quarters to 2.5-3% through the latter half of 2010 and through 2011. This is going to be consistent with job gains in the range of 15,000-25,000 on a monthly basis.
Retail sales have been weakening after posting a 2.3% gain in Q1, one that was the biggest jump since Q1 2006. Part of that gain was base effects from a depressed level o sales activity, but fundamentally it was driven by temporary factors including government transfer payments and a drawdown in personal savings. Those trends have now reversed with sales being driven by fundamentals that remain infirm. Wage growth remains weak, unemployment high, and the sell off in risk assets is beginning to dull consumer confidence all of which point to below trend growth in consumption. The June report is expected to show sales falling for the second consecutive month and the overall pace of sales below the level posted in March. The broader trend toward slower core sales growth also appears to be intact. Building materials surged on the tax incentive driven increase in home sales. Sales ex autos and building materials have been weakening since February and ex autos since March.
Industrial production has experienced a spectacular rebound this past year as the recovery in domestic and global demand has contributed to the dramatic turnaround in overall manufacturing and mining sector activity. This positive momentum should slow significantly in June, when industrial production is expected to remain unchanged following the 1.3% M/M surge in May. The dramatic moderation in the pace of growth for industrial production during June reflects a moderation in utility output which surged by 5% in May, and a more modest slowdown in manufacturing output. Going forward, industrial output, one of the hottest sectors of the economy, faces increasing headwinds. Strong export growth has been a boon to output but that export momentum is poised to decline at a time when inventory building is showing evidence of leveling off. This trend has begun to be reflected in the ISM survey. June capacity rates should remain unchanged, holding comfortably above the recession low of 68.2%.
Core prices continue to decelerate across broad swaths of the economy with core commodity prices joining the ongoing disinflation in core services, one driven primarily by the collapse in rents. In June, core commodities are forecast to decline for the fifth consecutive month leaving the y/y change at 0.7%. This is well off the recent peak of 3% y/y posted at the end of 2009. Core services should remain broadly flat with a modest uptick with prices constrained by weak rents and a reversal in hotel prices which have jumped smartly over the past two months. Overall core prices should be unchanged on the month. Headline inflation is forecast to fall by 0.1%, the third decline in as many months. With core prices rising at only a 0.2% annual rate over the past six months, the latest inflation report will remain supportive for bond markets. The implications for monetary policy are obvious. While we do not expect outright deflation to take root, risks are mounting that we get perilously close.
CANADA: UPCOMING KEY ECONOMIC RELEASES
Canadian International Trade - May
* Release Date: July 13/10 * April Result: $0.2B * TD Forecast: -$0.5B
Despite the strengthening domestic currency and robust domestic demand, the Canadian merchandise trade balance has managed to eke out surpluses in 4 of the last 5 months. This positive momentum is expected to end in May when the trade balance should deteriorate to a $0.5B deficit, following the meagre $0.2B surplus in April. During the month, we expect the combination of weak global demand for Canadian products and lower energy prices to push exports down. Imports are expected to rise, undoing some of the 2.2% M/M drop in April. In real terms, both exports and imports should rise, though the net effect on real economic activity is expected to ambiguous. In the coming months, we expect the trade balance to improve modestly, though the pace of improvement will invariably be constrained by the strong Canadian dollar.
Canadian Manufacturing Shipments - May
* Release Date: July 15/10 * April Result: 0.2% M/M * TD Forecast: -0.5% M/M
After the dramatic turnaround this past year, Canadian manufacturing sector activity looks set to falter in May as the impact of waning global demand and the strong Canadian dollar eat into the recent positive momentum built up in the sector. During the month, we expect the value of sales to decline by 0.5%, which will only be the 3rd monthly drop in this indicator in the past 12 months. Shipments are expected to be weaker across the board, with sales of housing-related and transportation equipment expected to decline materially, while sales of petroleum products should rise, though not sufficiently so as to offset the drop in other industries. If there are any risks to this call, they are to the downside. Real manufacturing sales should also be weaker on the month, suggesting that the sector will be a source of drag for Canadian economic activity. In the coming months, we expect the bounce-back in the Canadian manufacturing sector to remain largely on track, though the pace of recovery should moderate.
The Canadian dollar gained for the fourth straight day against its U.S. counterpart and strengthened versus the euro today after the labor market posted the very positive set of results.
The employers added 93,000 jobs in June, the astonishing number, which is about 5 times higher then the expected increase by just 17,900 jobs. The unemployment rate dropped to 7.9 percent from 8.1 percent in May, falling below 8 percent threshold for the first time since January 2009. According to the International Monetary Fund, the job market was the main contributor to the fast recovery of the Canadian economy, which may lead the advanced economies in 2010.
Some analysts say that there is the 80 percent chance that the good news would encourage the Bank of Canada to increase the interest rates. The central bank raised the target rate from the record low 0.25 to 0.5 last month; next meeting of the bank’s policy makers will occur on July 20th.
USD/CAD traded near 1.0324 as of 16:38 GMT after opening at 1.0421. EUR/CAD traded at about 1.3054 down from the opening price of 1.3230.
The dollar gained ground against the euro and other major currencies on Friday as U.S. stock futures turned lower, reviving some interest in the relative safe-haven status of the greenback at the end of a solid week for the euro.
The biggest advance came from the Canadian dollar, which rallied after a government report showing stronger-than-expected jobs growth for June.
Greenback still ahead on day except against CAD and NZD, but has pared gains as US equities trade in the black. ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, at 83.968 from 83.699. Currencies largely unfazed by rise in US wholesale inventories in May. EURUSD has stabilized, now at USD1.2627 from intraday low at USD1.2609, but down from USD1.2703 late Thu. USDJPY at JPY88.48 from JPY88.38, while GBPUSD at USD1.5120 from USD1.5155.
With little U.S. economic data on Friday's schedule, focus was given to a report from Statistics Canada, which said employment in the country rose by 93,000 last month, pushing the unemployment rate to 7.9% from 8.1%.
On Thursday, the dollar declined against the euro after European Central Bank President Jean-Claude Trichet calmed investors' concerns about European bank stress tests and the central bank's liquidity programs.
Trichet spoke again on Friday, saying that the financial crisis continues even if a catastrophe has been averted.
Market expectation
The euro earlier rose to USD1.2725, but it has slipped to USD1.2623 as of this writing. The action is a failed test of daily resistance at USD1.2713. The euro now is liable move down to USD1.2565. If trades are stopped above USD1.2713 look for a move up to USD1.2786. In that case take profit USD1.2749, traders said.
The Pound found support at weekly lows around the USD1.5070/80 zone. The pair rebounded and rose back above USD1.5100 after the US opening bell. Currently is testing levels above USD1.5120, still down for the day and continues to move sideways, in a range between USD1.5070 and USD1.5240.
Pound slump approached to the base of the daily ascendant channel sit at USD1.5060 today, thus hourly CCI reached the -200 level and bounced back, suggesting some recoveries for the UK currency right now. Upside could be limited by USD1.5150/60 key resistance zone, analysts report.
(Reuters) - The Canadian dollar rose sharply against the U.S. dollar on Friday after data showed a bigger-than-expected increase in jobs gains in June.
Official data showed Canada added a whopping 93,200 jobs in June, compared with forecasts for a 15,000 increase.
The unemployment rate unexpectedly dropped to 7.9 percent from 8.1 percent in May.
The U.S. dollar fell 0.8 cent to C$1.0340, its lowest since late June.
Today was the second day of gains against the U.S. currency for the Canadian dollar, as the rebound of the stocks and the rising prices for crude oil increased the attractiveness of the growth-linked currencies.
The Standard & Poor’s/TSX Composite Index, Canada’s main gauge, went up 0.9 percent, while the Dow Jones Industrial Average rose by 1.4 percent. Futures on crude oil, the biggest nation’s export, gained 2.2 percent to $73.55 per barrel on the New York Mercantile Exchange. The news proved favorable to the economic growth outlook, boosting the currencies, tied to the growth, including the loonie.
The correlation of the Canadian currency to the price of crude oil is 74 percent, and 89 percent to the Dow. A correlation of 100 percent would indicate the moves in lockstep.
USD/CAD traded near 1.0492 as of 18:50 GMT today after it opened at 1.0542. EUR/CAD traded near 1.3267 down from the opening level of 1.3309.
