Stronger US PMI Data and Geopolitics overshadowed Loonie
The Canadian dollar began the week under pressure against the US dollar. The lonnie failed to appreciate versus the greenback despite a strong manufacturing sector report in September. The Markit Canada Manufacturing Purchasing Managers index (PMI) rose to 55 from a previous 54.6 in August. Released half an hour later the US Institute for Supply Management PMI jump to 60.8, the fasted pace in 13 years. The leading indicator boosted the USD as a strong pace of growth would lead to a third interest rate hike by the U.S. Federal Reserve.
Following a mixed third round of NAFTA talks in Ottawa last week the US is back to business by filing a trade complaint over the sale of Canadian wine in retail shops. The US Commerce department also slapped a 200 percent tariff on Bombardier CSeries jets. The actions taken into context have almost eroded any possibility of NAFTA negotiations finishing this year. The US and Mexico want to avoid the matter from dragging into 2018 as it is an election year (presidential in Mexico and primaries in the US).
The CAD got little support from oil prices on Monday. Energy prices tumbled more than 2 percent with reports of higher output from Iraq and Lybia at the same time US drillers and refineries recovered from the tropical storms.
The USD/CAD gained 0.263 on Monday. The currency pair is trading at 1.2504 after the US currency appreciated on the back of rising anticipation of a third interest rate hike this year. Geopolitics were a major factor over the weekend as the Catalunya referendum is reducing confidence in the EUR after the Spanish government cracked down on voters. The single currency has survived two close calls after the French and German elections, but stability of the region is once again in question after this weekend’s events.
U.S. Federal Reserve and Federal Open Market Committee (FOMC) voting member Neil Kashkari continues to be a dove. He has dissented from raising rates in the last two votes and in his view the current monetary policy tightening is keeping inflation down. He would rather wait for inflation to pick up to the 2 percent target before pulling the trigger on another interest rate hike. Dallas Fed President Robert Kaplan was more moderate and is willing to be convinced by upcoming indicators if he is to vote for a rate hike in December. Kaplan did mention that while the Fed has room to raise rates, it might not be as much as people might think.
Energy prices fell 2.055 percent in the last 24 hours. West Texas Intermediate is trading at 50.24 after news of higher supply from Organization of the Petroleum Exporting Countries (OPEC) and US based operations. The disruptions due to tropical storms in the US are slowly working themselves out and the geopolitical situation in Northern Iraq has not affected global supply. Iraq in fact announced a rise in exports in September. Risks remain that the situation could escalate as the Kurdish region has voted for independence but lacks the recognition of the central government.
Market events to watch this week:
Tuesday, October 3
4:30 am GBP Construction PMI
Wednesday, October 4
4:30 am GBP Services PMI
8:15 am USD ADP Non-Farm Employment Change
10:00 am USD ISM Non-Manufacturing PMI
10:30 am USD Crude Oil Inventories
3:15pm USD Fed Chair Yellen Speaks
8:30 pm AUD Retail Sales m/m
8:30 pm AUD Trade Balance
Thursday, October 5
8:30 am CAD Trade Balance
8:30 am USD Unemployment Claims
Friday, October 6
8:30 am CAD Employment Change
8:30 am CAD Unemployment Rate
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate
