USD/CAD Strong Canadian Data Reduces Rate Cut Expectation

A higher price of oil and stronger than expected manufacturing data out of Canada boosted the loonie versus the U.S. dollar. Brent rose above $60 as energy companies continue to announce earnings and spending cuts impacting the forecast for crude supply.

Canadian manufacturing sales rose 1.7 percent in December and might just be what the Bank of Canada is looking for to pause its easing monetary policy that has brought on two rate cuts as the economy is still struggling after the drop in energy prices. Alberta was the shining light during the crisis years as a stronger currency devastated the manufacturing base. The oil producing province is now hurting after the low price of oil due to a global oversupply that is pricing out expensive shale fields. There was plenty of raised eyebrows when it was suggested it was manufacturing’s time to shine, but the recent data is proving them wrong for the time being.

The USD/CAD was trading above 1.25 when the release appreciated the CAD which made its way to a low for the day at 1.2440. The pair continues to trade around 1.2480 near the end of the trading session. USD/CAD broke through two support lines at 1.2500 and 1.2450 but could not hold for long before moving to current levels. 1.2454 is the new support line with 1.2495 the new resistance level.

U.S. retail sales and jobless numbers were dismal on Thursday. Core Retail Sales declined by 0.9%, while Retail Sales dropped by 0.8%. Both were well off their estimates of 0.4%. There was no relief from unemployment claims, which jumped to 304,000 compared to 284,000 in the previous reading. The markets had expected a stronger reading of 282,000. The USD was riding high after a stronger than expected nonfarm payroll last week, but the U.S. retail sales numbers have a history of deflating the dollar rally. More data is needed to see if the NFP numbers were part of a trend, or a solitary outlier amongst indicators signaling a slow down of the U.S. economy.

The Bank of Canada had been hinting for some time that it could cut rates as oil prices deteriorated. With the obsession with the Federal Reserve impending rate hike, it was assumed last year that the BoC would follow its lead. Governor Stephen Poloz was clear that if the right conditions presented itself they would need to hike, but conditions could warrant a cut. The central bank is seeing further slowdown and the impact of energy prices triggered their 25 basis points reaction. The benchmark interest rate in Canada now stands at 0.75 percent, which gives the BoC plenty of room if further cuts are needed. The strong manufacturing release also reduces the expectation from the market around how fast will the rate be cut.

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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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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