USD/CAD continues to have an uneventful week. The pair has edged higher on Friday as it trades at the 1.31 level. It’s a quiet end to the week, with just two minor events on the schedule. Canada will release Foreign Securities Purchases, which is forecast to climb to C$11.59 billion. In the US, the CB Leading Index is expected to post a gain of 0.5% for a second straight month.
The US economy continues to perform well, as underscored by sharp economic data on Thursday. Unemployment claims were slightly higher at 239 thousand, but beat the forecast of 245 thousand. On the manufacturing front, the Philly Fed Manufacturing Index soared to 43.3 points, crushing the estimate of 18.5 points. This marked its highest level since 2011. Earlier in the week, the Empire State Manufacturing Index also climbed sharply, with a reading of 18.7, compared to the forecast of 7.2 points. The surprisingly strong data is welcome news from the manufacturing sector, which like other industrialized countries, has been battered by globalization. President Trump has promised to bring manufacturing jobs back to the US and invigorate the struggling sector. There was more good news from the inflation front, as PPI and CPI posted respectable gains of 0.6% in January, above their estimates.
With the US economy firing on all cylinders, Federal Reserve Chair Janet Yellen is in the enviable position of deciding the appropriate timing of a rate hike. Earlier this week, Yellen made her semi-annual appearance before Congress. In her testimony, Yellen sounded upbeat about the US economy. She noted that inflation is moving towards the Fed’s two percent target, the labor market remains red-hot and consumer spending is strong. A rate hike appears to be just a question of time, as Yellen warned that "waiting too long to remove accommodation would be unwise". If the US economy stays on track in 2017, analysts expect two or three small rate hikes. At the same time, the Fed needs to take into account the economic stance of the new administration, which remains unclear. President Trump has promised to outline a tax reform plan in a few weeks, but has left the Fed and the markets in the dark regarding economic policy. Barring an unexpected tailspin from the economy, the Fed is likely to raise rates in the first half of 2017.
With relations between Britain and the European Union severely strained over Brexit, Canada is poised to take advantage of the situation. The EU and Canada have finalized a free trade agreement (CETA), which must now be ratified by both sides. On Tuesday, the House of Commons voted on Tuesday to adopt the agreement, as did the European Parliament. The legislation now moves to the Canadian Senate, which is expected to stamp its approval in March. CETA is expected to boost Canada-EU trade by 20 percent, which translates into $12 billion for the Canadian economy. Both sides have high hopes from the agreement. Canada is looking to reduce its dependence on the United States, which is the destination of 80 percent of Canadian exports. President Trump’s protectionist stance has sent alarm bells off in Ottawa, with Trump declaring he would rip up NAFTA. Trump has since lowered the rhetoric, saying that while he wants to make significant changes with Mexico, he merely wants to "tweak" the agreement with Canada. Still, given Trump’s unpredictability, Canada will be looking to build on CETA and conclude trade agreements with other countries. For the EU, this would mark the first trade agreement with a G-7 member and comes at a time when EU-US free trade talks have been suspended.