Canadian dollar keeps rally alive despite weak Ivey PMI

The Canadian dollar has rallied for a third straight day on Wednesday. In the North American session, USD/CAD is trading at 1.3729, down 0.41% on the day at the time of writing.

Canada’s Ivey PMI decelerates

Canada’s Ivey PMI, a useful gauge of economic activity, fell to 57.6 in July, down from 60.0 in June and shy of the market estimate of 62.5. This indicates that the economy continued to expand in July, but a slower pace. The employment gauge rose while the prices index fell, another indication that inflation is on a downward trend.

The Bank of Canada responded to lower inflation by lowering rates for a second straight time and has trimmed interest rates by 0.50% after a prolonged hold which lasted close to a year. Interest rates are still high at 4.5% and BoC policy makers will want to see the Federal Reserve also cut rates so that the US/Canada rate differential does not widen further and hurt the Canadian dollar.

The markets have priced in a half-point rate cut from the Fed in September at 63%, a massive shift from last week’s probability of just 11.8%, according to the CME’s FedWatch. Investors are expecting a strong response from the Fed to recent signs that the US economy is quickly deteriorating, such as the soft nonfarm payrolls for July. The fears of the US economy tipping into a recession routed the global markets early in the week. The panic has dissipated and the markets have partially rebounded, but investors remain jittery that the sell-off may not be over.

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USD/CAD Technical

• USD/CAD is testing support at 1.3743. Below, there is support at 1.3700
• There is resistance at 1.3799 and 1.3842