USD/CAD Loonie Weaker After China and US Fundamentals

China Stimulus News and Stronger US Durable Goods Boost USD

The loonie is having a volatile week with little Canadian data to guide the currency. The USD/CAD pair has been driven by safe haven flows after the People’s Bank of China (PBoC) missed its window to intervene during the weekend, which turned a local stock market rout into a global one. Yesterday’s announcement of an interest rate cut and a lower reserve ratio by the Chinese central bank got the majority of markets out of the red. The USD advanced against the CAD but lost some of the upward momentum as the number of durable goods orders were to be announced.

Orders to U.S. factories jumped 2.0 percent in July crushing expectations of a –0.4 percent decline. The more important core data that excludes transportation items also showed strong overachievement at 0.6 percent versus the 0.3 percent forecast. The news about stronger demand for U.S. goods was a boon for the U.S. dollar that was struggling against major as news about China put the fate of the much-awaited Federal Reserve interest rate hike in doubt. Expectation of Interest rate divergence has been the main driver for the USD as most major central banks remain committed to easing monetary policy via rate cuts and quantitative easing. The Bank of Canada (BoC) has been forced to cut 25 basis points from its benchmark interest rate twice in the year. The rate stands at 0.50 percent as BoC Governor Stephen Poloz aims to give Canadian exporters a competitive advantage with a lower loonie. It is to early to tell if the strategy will pay off in the mid term as Canada faces a technical recession fate if the monthly data does not improve substantially.

The CAD has depreciated 12.55 percent versus the USD in 2015 as both central banks and the economies they oversee are walking on diverging paths. Lower demand of commodities has hit the Canadian economy hard as oil producing Alberta was once the main reason Canada avoided falling into a recession. With that crude buffer gone, service and manufacturing exports have a long way to go before they can make up the gap. The lower loonie has helped, but as evidenced by the July interest cut by the Bank of Canada it can go lower faster.

The eyes of market participants will be glued to news terminals seeking headlines from the Jackson Hole annual meeting of central banking elite. It will be strange that as many as half of the members of the Federal Open Market Committee won’t be attending. Given their importance as interest rate setters their absence will take some value from other non voting member comments. A September rate hike probabilities have slimmed down considerable after the market’s reaction to China. Critics of the rate hike even before the stock market rout have pointed out that even if the U.S. economy could take a higher interest rate, the global economy might not. Those voices will probably sound off again in Jackson Hole, with the only question remaining: Will the Fed listen?

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