The USD received a one-two punch this morning on the economic data front. The ADP non farm employment report was released and it missed expectations at 189,000 jobs versus the forecasted 227,000. This is the lowest reading for private payrolls since January of 2015. The market has been overtly sensitive to U.S. missed expectations and while not a heavy correlation between the ADP and this Friday’s Non farm payrolls (NFP) the market will decide the fate of the USD after the biggest indicator in forex is published at 8:30 am EDT.
The Institute for Supply Management Purchasing Managers Index (ISM PMI) signalled a continued expansion but at a lower pace than forecasted. The PMI registered a 51.5 percent reading that is a contraction of 1.4 points compared to February’s data. While the good news is that U.S. manufacturing continues to expand the deceleration rate is cause for concern as the threat of a strong USD will continue to weigh on manufacturing.
There were no Canadian economic releases and the market devalued the USD versus the CAD after the softer than expected ADP and ISM figures. The USD/CAD trades below 1.2590 as the U.S. dollar is losing ground against all major pairs. The Loonie started to appreciate after the release of the ISM when it was trading at 1.2670. The pair is now range bound between 1.26 and 1.2580 in a low volume environment before the Good Friday holiday.
Employment will continue to play a big part in the direction of the U.S. dollar with the upcoming unemployment claims on Thursday adding another hurdle for the USD. Unemployment claims have been decreasing in the past three weeks and have not been above 300,000 since March 12. The forecast by analysts is for the number of individuals filing unemployment to have climbed slightly at 286,000 last week up from 282,000 two weeks ago.
The Canadian trade balance figures will be released at the same time as the unemployment claims. The drop in oil prices hit the balance of trade in Canada last month when it widened the trade deficit to -2.5 billion when a -0.9 billion was expected. Energy exports will continue to decrease as the price of crude is still under pressure from a supply glut. There are reasons for optimism as non-energy exports increased last month, and should be further supported by a lower loonie.
The Bank of Canada Governor Stephen Poloz has mentioned that the surprise rate cut in January was a pre-emptive move to avoid a further slowdown. If the trade balance continues to show the Canadian economy is losing traction it could put pressure on the central bank to cut rates again. The interest rate differential favours the USD as the expectation is for the Federal Reserve to hike the benchmark interest rate as early as June, but more likely in its September meeting.
The USD decline today boosted commodities as energy and metals were up on the softer U.S. data. Energy prices were hit by negative data as both the OPEC production is at a record high and U.S. inventories continue to climb. Only the USD weakness was able to reverse the downward trend, but commodities for the time being are dependent on U.S. economic data affecting the USD than on fundamental supply/demand and even geopolitical situations.