The Canadian dollar has ticked higher on Tuesday. Currently, USD/CAD is trading at 1.2670, down 0.03% on the day. In the US, today’s major event is US JOLTS Jobs Openings, which is expected to improve to 5.74 million. On Wednesday, the US releases two employment indicators – Preliminary Nonfarm Productivity and US Preliminary Unit Labor Costs. Canada will release Building Permits.
The Canadian dollar has posted strong gains against the greenback in recent weeks, gaining 6.0% since June 1. Investor appetite for the US dollar, as political risk has been growing and there are doubts if the Fed will raise rates before 2018. President Trump’s administration seems rudderless and Trump’s inability to pass healthcare legislation has increased political risk in the US. As well, the Federal Reserve’s monetary policy remains unclear. Earlier this year the Fed strongly hinted that it planned to raise rates three times in 2017, but has only pressed the rate trigger twice. In June, Fed Chair Janet Yellen shrugged off low inflation, saying that it was due to "transient" factors, leaving the impression that the Fed still planned one final hike. However, inflation has not improved and the Fed has changed its tune. Last week, St. Louis Federal Reserve President James Bullard said he opposed further Fed hikes, warning that another hike would actually delay inflation from hitting the Fed’s target of 2%. The markets have become more skeptical about a rate hike in December, as the odds have fallen to 33%, compared to 43% a week ago. In contrast to the Fed, it’s full steam ahead for the Bank of Canada. The bank raised interest rates in July and the improving economy could mean that more rate increases lie ahead. In May, annualized GDP was up 4.6%, and the labor market continues to produce jobs. The increase in oil prices has revived the economy has also pushed the Canadian dollar higher.
The US economy continues to grapple with weak inflation, which is also apparent in the labor market. Although the nonfarm payrolls report in July easily beat expectations and the unemployment rate dropped from 4.4% to 4.3%, wage growth remains a sore point. In July, Average Hourly Earnings remained unchanged at 0.3%, and the indicator has failed to break above 0.3% in 2017. The weakness in earnings growth has puzzled economists, as a red-hot labor market should translate into higher wages. In fact, wage growth has actually slowed in 2107, and this could have significant economic repercussions, as consumers are responding by holding tight on the purse strings and reducing spending.
