USD/CAD Canadian Trade Deficit Boosts Loonie but US ISM Clips Wings

Canadian Trade Deficit Shrinks While US Balloons

The USD/CAD had a volatile trading day on Wednesday. The USD continued to trade higher versus the Canadian dollar in the Asian trading session at around 1.3190. Given the importance of the employment component as a driver of the a possible interest rate hike by the U.S. Federal Reserver the release of the ADP private payroll was in focus. The ADP missed expectations with 185,000 jobs added when 216,000 were forecasted. The CAD was able to gain more after the Trade Balance indicators were released for the U.S. and Canada. The U.S. continues to suffer from a strong USD as imports increased and widened the trade deficit to 43.8 billion. In contrast a weak loonie was able to reduce the trade deficit in Canada beyond the forecasts. The Canadian trade gap was reduced to 0.5 billion thanks to a weaker currency that has helped exports offset some of the losses from energy sales. The previous month the deficit was 3.4 billion and the forecast was for a smaller reduction to a 2.6 billion deficit

The trade indicator divergence boosted the loonie which was able to recoup some of the weekly looses and broke the 1.3140 USD/CAD price level.

Service Sector Comes to USD Rescue

The gains proved to be short-lived as the USD came roaring back after a surprising non manufacturing ISM released at 10:00 am EDT. The service sector came to the rescue as it printed a 60.3 reading, the highest since 2005. The market was anticipating a 56.2 reading. The non manufacturing sector accounts for two thirds of U.S. economic activity so the data was supportive of an interest rate hike by the U.S. central bank.

The USD/CAD quickly traded above 1.3160 following the rerelease of the non manufacturing ISM and continued to rise with 1.32 close to being broken.

Tomorrow the Bank of England (BoE) will announce a deluge of economic and monetary policy data points that is known as “Super Thursday”. Alongside the quarterly inflation report and the monthly rate announcement the BoE will for the first time publish the minutes form the Monetary Policy Committee (MPC) which will shed some immediate insights into the how members voted. The unanimous vote for holding rates streak could be broken as some dissent has already been hinted by members. There won’t be enough for a rate hike, but given the pace recovery of the U.K. there are expectations that the hike camp will begin to grow.

The Canadian dollar will trade relative to the USD with only the American unemployment claims to provide fundamental data. The biggest indicator in forex the non farm payrolls (NFP) will be released on Friday and will make or break the USD. The American currency has been reacting to various data points as the Fed has made it clear it needs a strong signal of a sustained recovery, before it makes its decision to start tightening monetary policy. The resulting interest rate divergence is boosting the USD. Canada will also release employment data on Friday and could help or hurt the loonie’s position or at least shield it from the worst of a U.S. dollar rally.

USD/CAD events to watch this week:

Thursday, August 6
7:00am GBP BOE Inflation Report
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Official Bank Rate
7:45am GBP BOE Gov Carney Speaks
8:30am USD Unemployment Claims

Friday, August 7
Tentative JPY BOJ Press Conference
8:30am USD Non-Farm Employment Change
8:30am CAD Unemployment Rate
10:00am CAD Ivey PMI

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza