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Canadian manufacturing sales were up by a consensus-beating 0.6% in January - well above the 0.3% contraction expected by the markets. The story was even better when discounting price differences, with volumes up an even stronger 0.7% on the month.

Non-durable shipments were the crux of the story, rising 2.3% during January, while durable sales fell -0.8% m/m in nominal terms. Petroleum and coal products (+7.0%) and chemicals (+2.5%) accounted for most of the gain on the nondurable front, with some help from food & beverage shipments also. On the durable side, despite rising motor vehicle shipments transport equipment pulled back, down 2.9%, after lofty gains in the previous month, as aerospace (-11.8%) and other transport equipment shipments pulled back after a strong December print. Fabricated metals helped offset some of the losses on the durable side, up 2.4% in January.

Regionally, manufacturing sales were up in all but three provinces with Nova Scotia (-5.3%) and Quebec (-1.5%) posting the weakest readings given their non-auto transport equipment sectors. B.C.'s shipments were largely flat, at -0.3%. On the other hand, P.E.I. and oil-producing provinces of Newfoundland & Labrador, Saskatchewan, and Alberta saw the largest gains at 5.6%, 3.4%, and 2.7%, respectively.

Inventories were up 1.1% on the month, nudging the inventory-to-sales ratio down to 1.31 (preciously 1.30). Forward looking indicators were very encouraging, with new orders up 4.6% and unfilled orders up 0.3% in January.

Key Implications

This was another good news report for the Canadian manufacturing sector, suggesting that the momentum in the sector that heated up in late-2016 carried over into the beginning of 2017. The report provides some potential upside to our already solid first-quarter forecast of 2.6% for the Canadian economy (See our latest Quarterly Economic Forecast).

The report is also encouraging as far as future activity is concerned, with leading indicators such as new and unfilled orders looking better this month than they did prior. This suggests that the relatively low loonie and robust U.S. and global demand have proven beneficial for Canadian industry, with net trade likely to continue supporting economic growth for the rest of the year.

Having said that, there of remain a lot of uncertainties as far as the export sector is concerned, with "America First" trade rhetoric posing some downside risks as far as investment and net exports are concerned. These risks, alongside existing labor slack and a likely cooling in housing activity, should ensure the Bank of Canada remains on the sidelines until late next-year.

• Nominal manufacturing sales rose 0.6% to build on 2.1% and 2.3 % gains in December and November, respectively.
• Gains were broadly-based with 14 of 21 industries posting increases in January.
• Sale volumes rose 0.7% following a 2.1% December gain and 1.6% rise in November.
• Inventories increased 1.0% but the inventory-to-sales ratio was little-changed from the almost 6-year low posted in December.

Our Take:

An unexpected third consecutive gain in manufacturing sale volumes in January brought the latest three-month cumulative increase to 4.5% with the latest monthly reading up an annualized 11% from its Q4 average. Inventories also rose, suggesting that monthly production growth may have slightly outpaced the 0.7% increase in January sales volumes which, in turn, suggests that overall monthly GDP growth likely remained in positive territory after posting solid above-trend gains in each of November (0.5%) and December (0.3%). The monthly manufacturing data is notoriously volatile but sales growth has generally been outpacing production in recent months - with the inventory-to-sales ratio in January retracing little of a drop to an almost 6-year low in December - suggesting there is still room for near-term production to rise further. Survey based measures (eg. the Markit Canada Manufacturing PMI and CFIB's Business Barometer) of manufacturing activity have also generally improved to-date in 2017. Challenges in the sector still remain. It remains the case that much of the competitive boost from a weak Canada versus U.S. dollar as oil prices declined has been offset to-date by strength relative to other competitors for the U.S. import market (in particular, Mexico). As well, uncertainty about the future of Canada's trading relationship with the U.S. has likely being weighing on manufacturer's investment plans, which generates concern about the future of the sector over the longer-term. Nonetheless, recent trends are encouraging with early data for 2017 (including strengthening labour markets through February) suggesting that improved momentum in the economy over the second half of 2016 carried over into early 2017.

Market movers ahead

• Euro Flash PMI to remain strong in March as exports and investments are seeing a tailwind at the moment. Euro wage growth for Q4 will also be released. We expect another soft print just above 1% leaving underlying inflation pressure very subdued.
• We look for US durable goods orders to rise further as investment growth picks up. Markit PMI manufacturing for March is expected to be broadly flat.
• In the UK the main movers are CPI and retail sales. We do not expect them to change the fact that Bank of England is on hold for a long time.
• Main news in Scandi will be the Labour Force Survey in Norway. We expect the unemployment rate to stay around 4.5%.

Global macro and market themes

• A peak in ISM manufacturing and lower inflation removes the main reflation fuel for the bond bear market.
• Lower policy uncertainty and a soft Fed hike gave more support to the stock market.
• We are still long-term bulls on equities but very upbeat sentiment provides the risk of a short-term correction.

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USD/CHF - 0.9961

Original strategy :

Sell at 1.0020, Target: 0.9920, Stop: 1.0055

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.0020, Target: 0.9920, Stop: 1.0055

Position : -

Target :  -

Stop : -

As the greenback has remained under pressure, suggesting recent decline from 1.0171 is still in progress and may extend further weakness to 0.9920-25, however, loss of near term downward momentum should prevent sharp fall below 0.9900 and reckon 0.9870-75 would hold from here, risk from there has increased for a strong rebound later.

In view of this, would not chase this fall here and would be prudent to sell dollar on recovery as the lower Kumo (now at 1.0019) should limit upside and bring another decline. Only above previous support at 1.0060 (now resistance) would abort and signal low is formed instead, risk rebound to 1.0090-95 first.

GBP/USD - 1.2352

Original strategy :

Buy at 1.2310, Target: 1.2410, Stop: 1.2275

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.2290, Target: 1.2400, Stop: 1.2255

Position : -

Target :  -

Stop : -

As cable has eased after rising to 1.2399, suggesting consolidation below this level would be seen and pullback to 1.2320-25 cannot be ruled out, however, reckon downside would be limited o 1.2290-00 and bring another rise later, above said resistance at 1.2399 would extend recent rise from 1.2109 low to 1.2410-15 but reckon 1.2440-50 would hold, price should falter well below resistance at 1.2471, bring retreat later.

In view of this, would not chase this move from here and we are looking to buy cable on pullback as 1.2290-00 should limit downside and bring another rise. Below 1.2265-70 would suggest top is possibly formed, risk test of said support at 1.2241 which is likely to hold on first testing.

EUR/USD - 1.0735

Original strategy  :

Buy at 1.0675, Target: 1.0775, Stop: 1.0640

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.0675, Target: 1.0775, Stop: 1.0640

Position : -

Target :  -

Stop : -

As the single currency has eased after rising to 1.0782, suggesting consolidation below this level would be seen and pullback to 1.0725-30 cannot be ruled out, however, reckon downside would be limited to support at 1.0706 and the lower Kumo (now at 1.0674) should hold, bring another rise later to resistance at 1.0799 but loss of near term upward momentum should prevent sharp move beyond another previous resistance at 1.0829, bring retreat later.

In view of this, would not chase this rise here and we are looking to buy euro on pullback as 1.0670-75 should limit downside. Below 1.0640-50 would signal top is formed, bring weakness to 1.0620-25 but said support at 1.0600 should remain intact.

Daily Pivots: (S1) 112.94; (P) 113.24; (R1) 113.58; More...

Intraday bias in USD/JPY remains on the downside for 111.58 low. Current development argues that consolidation from 111.58 has completed with three waves to 115.49. And larger decline from 118.65 is resuming. Break of 111.58 will target 61.8% projection of 118.65 to 111.58 from 115.49 at 111.12. That coincides with 38.2% retracement of 98.97 to 118.65 at 111.13. We'd tentatively expect strong support from there to bring rebound. But firm break there will target 100% projection at 108.42. On the upside, outlook will stays bearish as long as 115.49 holds, in case of recovery.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

USD/JPY - 113.13

Original strategy  :

Sell at 114.00, Target: 113.00, Stop: 114.35

Position :  -

Target :  -

Stop : -

New strategy  :

Sell at 114.00, Target: 113.00, Stop: 114.35

Position :  -

Target :  -

Stop : -

Although the greenback recovered after falling to 112.90 yesterday and consolidation above this level would be seen for corrective bounce to 113.65-70, reckon 114.00 would limit upside and bring another decline later, below said support at 112.90 would extend recent decline from 115.51 to 112.76-77, then towards 112.50 but reckon downside would be limited to 112.00-10, bring rebound later.

In view of this, we are looking to sell dollar on subsequent recovery as 114.00 should limit upside. Only above previous support at 114.48-52 would abort and signal low is formed instead, risk a stronger rebound to 114.89 resistance first, break there would signal the retreat from 115.51 has ended, then gain to 115.20 resistance would follow.

Daily Pivots: (S1) 0.9940; (P) 0.9975; (R1) 1.0000; More.....

Intraday bias in USD/CHF remains on the downside for 0.9860 support. Corrective rise from 0.9860 should have completed at 1.0169 and fall from 1.0342 is likely resuming. Break of 0.9860 will target 100% projection of 1.0342 to 0.9860 from 1.0169 at 0.9687. On the upside, above 1.0018 minor resistance will turn bias neutral. But outlook will now stay bearish as long as 1.0169 resistance holds.

In the bigger picture, prior rejection from 1.0327 resistance argues that USD/CHF is staying in a medium term sideway pattern. In any case, decisive break of 1.0342 resistance is needed to confirm underlying strength. Otherwise, we'll stay neutral in the pair first. In case of another fall, we'd expect strong support from 0.9443/9548 support zone.

Daily Pivots: (S1) 1.2272; (P) 1.2324; (R1) 1.2408; More...

Intraday bias in GBP/USD remains on the upside as rebound from 1.2108 continues. Whole consolidation pattern from 1.1946 is still in progress. Stronger rise could be seen to 1.2705/2774 resistance zone next. On the downside, below 1.2240 minor support will turn bias back to the downside for 1.2108 instead.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.