The Canadian dollar has posted slight gains in the Wednesday session. In North American trade, USD/CAD is trading at 1.2726, down 0.25% on the day. On the release front, Canadian Foreign Securities Purchases shocked the markets, recording a decline of $C0.92 billion, compared to an estimate of a gain of $C 23.45 billion. This marked the first decline since December 2015. In the US, housing numbers were softer than expected. Building Permits dipped to 1.22 million shy of the forecast of 1.25 million. Housing Starts slowed to 1.16 million, missing the estimate of 1.22 million. Later in the day, the FOMC will release the minutes of its July policy meeting. On Thursday, there are two major events in the US – unemployment claims and the Philly Fed Manufacturing Index.
The Federal Reserve releases its July minutes on Wednesday, and the markets will be listening closely. Although we’re unlikely to learn anything new about the likelihood of a rate hike before the end of the year, analysts will be looking for further details about the Fed’s balance sheet, which has ballooned to $4.2 trillion. At the June policy meeting, the Fed outlined plans to begin reducing the balance sheet, but shied away from providing any details regarding the size of the reductions or a start time for the plan. Analysts expect September will be the start date, and the Fed could start the process by slowing its asset purchases by modest amount, such as $10 billion/mth. Once the reductions start, the US dollar stands to make gains for two reasons. First, the move would mark a vote of confidence in the US economy. Second, a reduction of $60 billion is expected to have the same effect as a quarter-point rate hike, which would make the dollar a more attractive asset for investors.
The Canadian dollar has lost ground in August, but has still looked hot this summer, jumping 5.7% since June 1. Some of these gains are linked to oil prices, which jumped sharply in July. At the same time, Canadian indicators have generally been strong, with a GDP gaining 0.6% in May, and the labor market showing improvement. In July, the Bank of Canada raised interest rates by 25 basis points to 0.75%. This was the first time the BoC raised rates since 2010, and the move has helped boost the currency. Despite the economic growth, Canada continues to grapple with weak inflation. CPI declined in June (the first decline in 2017), and the markets are braced for another soft reading on Friday, with an estimate of a flat 0.0%.
