The Canadian dollar continues to gain after the surprise announcement by the Bank of Canada (BoC) of raising its benchmark rate by 25 basis points. Canadian economic indicators were lower than expected with building permits falling 3.5 percent and the Ivey purchasing managers index (PMI) falling to 56.3 but with a positive indicator being employment continues to rise in what could be a preview of Friday’s Canadian jobs report.
The CAD advanced thanks to two factors. The aftermath of the BoC decision still lingers in the market. While not a total shock as a rate hike was expected, markets were anticipating a later date most likely the October meeting for the announcement. A Reuters poll shows that economists are seeing no more rates hikes in 2017 from Governor Poloz unless the strong pace of growth continues.
The other factor was the weakness of the USD. The dollar struggled on Thursday across the board as natural disasters and political drama sapped any traction that the currency could muster. Inflation data next week will guide markets as the probability of a third rate hike by the Fed this year looks even more remote.
The USD/CAD lost 0.678 percent in the last 24 hours. The currency pair is trading at 1.2141 after the USD underperformed on Thursday while the loonie is still riding high in the aftermath of the surprise rate hike from the Bank of Canada (BoC). The Canadian benchmark rate is now 1 percent, and the interest rate raise was not a total surprise, it was anticipated to be in October, but the BoC followed through on the hawkish rhetoric it launched in June amongst other central banks only to see them backtrack.
Canadian employment data will close a strong week for the CAD. The economic consensus is for another gain of 15,000 jobs in August, keeping the unemployment rate at 6.3 percent.
US unemployment claims climbed to a two-year high due to the impact of Hurricane Harvey. Initial jobless claims rose to 298,000, beating estimates of 242,000. Employment has been the strongest pillar in the US economic recovery, but lately the lack of wage growth has made it hard for the U.S. Federal Reserve to keep raising interest rates this year. The Fed will meet on September 19 and 20, and will publish its economic projections. The US central bank is expected to announce its balance sheet reduction timeline at the September meeting with Fed Chair Janet Yellen giving a press conference to give further details.
Gold rose 0.89 percent on Thursday. The yellow metal is trading at $1,345.49 after the European Central Bank (ECB) made no change to its rate or quantitative easing program despite improving economic conditions. The USD has not shaken off the political risks at home and abroad and with the effect of Hurricane Harvey adding to number of unemployment claims with two other storms in the horizon the precious metal has risen on dollar weakness.
Tensions involving North Korea are keeping the safe haven commodity bid as China is looking for the UN to take more actions in the matter. The lack of traction of US inflation has put question marks on the third rate hike from the Fed this year. Next week’s US inflation data and the upcoming September monetary policy meeting could stop the advance of gold, but only if there are any signs of higher inflation that could keep the hopes of a December rate hike on the table.
The EUR/USD gained 0.668 percent on Thursday. The single currency is trading at 1.1997 after the European Central Bank (ECB) punted its decision to start the QE tapering until the October monetary policy meeting. While not exactly what the market was expecting, now there is a firm date that ECB President Mario Draghi has committed the central bank to. Growth has picked up in Europe, and with it the EUR has soared yet inflation remains tame raising concerns about how much stimulus to taper and how quickly. German policy makers want as much as possible in the short term, but they are not the sole decision makers which is why the decision has taken so long and will probably be gradual.
US political turmoil has also boosted the single currency as the dollar has lost some footing as a safe haven with self induced wounds. A republican president with majority in the house and senate was never anticipated to have this much trouble passing legislation and yet Donald Trump has proven to be a unique leader.
Market events to watch this week:
Friday, September 8
4:30 am GBP Manufacturing Production m/m
8:30 am CAD Employment Change
