Canadian Economy Clouded With Uncertainty Despite Strong 2017 Start

Canada’s economy is riding a wave of optimism following a strong start to the year, as gradually rising oil prices and a rebound in manufacturing have fueled job creation and triggered above-trend growth. But not everyone is of the belief it’s smooth sailing from here.

The Bank of Canada (BOC) remains unconvinced that the latest bout of good fortune is sustainable. In leaving its trendsetting interest rate at 0.5% last week, policymakers stressed that uncertainties continued to overshadow the nation’s outlook.

The BOC has been consistent in its message that the health of the recovery is far from guaranteed. Subdued inflation, elevated consumer debt levels and runaway house prices are all signs that trouble may be brewing.

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USD/CAD Weekly Forecast May 29-June 2

USD/CAD declined for a second consecutive week to hit a one-month low prior to bouncing from important support. The pair trades in a critical technical area that will be important for the broader trend.

The currency pair showed resilience to start the week out as it traded relatively unchanged ahead of the BoC meeting despite a rise in oil prices. The price action suggests market participants were preparing for a dovish bank statement but a fairly neutral statement triggered a strong loonie on Wednesday for a decline to one-month lows.

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Canada current account balance -14.05B vs -12.0B est

  • Imports of goods rose by 4B while exports increased by 2.2B
  • Canada foreign direct investlment abroad was a record 49.3B vs 33.2B in the prior quarter and 16.7B a year ago. This was led by mergers and acquisitions
  • There was a 1.8B deficit in traded goods in the 1Q. This compares unfavorably to the 68 million surplus in the 4Q
  • Foreign direct investment in the Canada 8.7B remains near low levels since the end of 2015.
  • The deficit in investment income widened by about 200M to 5.4B

USD/CAD Struggles To Sustain Early Day Gains

USD/CAD briefly touched the highest level since Wednesday but fell under pressure in the North American session to give back gains.

Canadian data was weaker than expected but a rise in the USD/CAD exchange rate as a result of the data was short-lived. The current account deficit was reported to widen to $14.1 billion (CAD) in the first quarter versus an expected $12.0 billion. The data triggered a marginal and brief push above Thursday’s high prior to a turn lower that wiped out the entire gain.

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Canada Markit manufacturing PMI 55.1 vs. 55.9 last month

May Markit manufacturing PMI
The May Canada Markit manufacturing PMI is coming in lower than the record 55.9 reading from last month. This month the index came in at 55.1.
  • The index was at 52.1 a year ago
  • Supplier delivery times fall to 43.1 vs 45.3.
  • Last month the index was the highest reading for the index (going back to June 2014)
  • The index has been above the 50 level since March 2016.
  • Robust rises in output, new orders and employment

USD/CAD forecast for the week of June 5

The USD/CAD pair had an interesting week, initially breaking above the 1.35 handle, and then rolling back over only to bounce again. I believe that we are trying to form a little bit of a base just below, but as you can see on the longer-term chart, I also have an uptrend in channel drawn out that could suggest a deeper pullback. Obviously, we have a massive amount of influence coming from the oil markets, which of course have been erratic to say the least. I believe that if oil falls, that should push this market much higher, and I think that will happen given enough time. Having said all of that, we could still drop down to the 1.3250 level and remain in the uptrend in channel rather comfortably. I think the volatility and choppiness continues, so I am going to be very selective about how I get involved into this market.

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Canadian April IVEY PMI Index Slides To 53.8, Weakest Reading For 9 Months

The Canadian IVEY PMI index fell sharply to 53.8 for May from 62.4 in April. This was well below consensus expectations of 62.0 and the lowest reading for 9 months.

The deliveries index declined to 44.6 from 49.1 and has been below the 50.0 level for the past 6 months which will maintain concerns surrounding underlying production trends.

Canadian April Building Permits Decline 0.2%, Residential Sector Weakens

Canadian building permits declined 0.2% in value terms for April following a revised 4.9% decline for March which was originally reported as a 5.8% decline. The data was significantly weaker than an expected rebound of 2.0% for the month and there was a 3.3% annual decline.

The total number of permits for dwellings declined 0.7% on the month with a 1.9% annual decline.

USD/CAD: Stay Short & Fade Rallies

USD/CAD saw its biggest one-day move in nearly two-weeks following the DoE crude inventory report.

"The DoE report was quite weak, reflecting two notable factors. First, total inventories showed a significant build of nearly +3.3mn. This comes despite the decent drawdown in the API data earlier in the week. Second, the DoE report showed a significant buildup in gasoline supply, which is consistent with earlier reports. Crude saw another 5% drop and marked a close below the key $47bbl level.

Keep in mind the nearly 0.5% bounce in USDCAD is consistent with the beta on a 5% drop in oil"

"Still, we remain short and look to fade the rally,"

Source ...

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