The Canadian dollar continues to have a quiet week. In Tuesday’s North American session, the pair is trading at 1.3244, down 0.31% on the day. On the release front, there no Canadian events until Thursday. In the U.S., inflation indicators missed their estimates. PPI declined by 0.2%, missing the forecast of -0.1%. This was the weakest reading since July 2016. Core PPI dropped by 0.1%, shy of the estimate of 0.2%. There was no relief from the manufacturing sector, as the Empire State Manufacturing Index plunged to 3.9 points, down from 10.9 points a month earlier, and short of the estimate of 11.6 points.
After a dismal 2018, the Canadian dollar has sparkled in January, gaining 2.7% since the start of the year. Risk appetite has improved, which has been a catalyst for the currency’s impressive rally. However, there could be trouble ahead, as China continues to show signs of an economic slowdown. On Monday, China released dismal economic numbers, with exports down 4.4 percent from a year earlier and imports plunging 7.6 percent. The slowdown in China has taken a toll on corporate profits, with Apple and Jaguar Land Rover posting revenue warnings.
The Federal Reserve has made a U-turn on monetary policy, but by how much? There is a large discrepancy between Fed forecasts and market expectations, which could result in volatility in the currency markets, as traders try to figure out what the Fed will do in 2019. The most recent projections from individual policymakers in the Federal Open Market Committee (FOMC) stands at two rate hikes this year, but the markets are expecting the Fed to hold pat and not raise rates in 2019. Moreover, the markets have priced in a rate cut before the end of the year at 28 percent. On Monday, former Fed Chair Janet Yellen said that she expected the Fed to take a breather, saying that it’s ‘very possible’ that the Fed has made its last hike of this cycle.
