As we write, the USD/CAD currency pair is trading just above 1.4010 in the Asian trading session on Tuesday. It’s further tracking Monday’s recovery momentum pretty well. This stability has occurred in the face of the overwhelming dovish sentiment that has recently surrounded the Federal Reserve’s monetary policy. Recent US Dollar volatility, coupled with worse than expected macro data, creates the backdrop for this currency pair.
Of course, on Monday, the USD/CAD pair staged a huge reversal. The net effect continued to be strength of the US Dollar — strength against the Canadian Loonie. The US Dollar Index (DXY) gauges the greenback’s value against a basket of six other currencies. It was climbing back above 99.40 after recovering from a monthly nadir of a little under 99.00. Part of what made this recovery special was its greater contribution to the USD’s strength—appreciation that is now being undermined by a slew of disappointing economic reports.
Economic Indicators Impacting Currency Movements
Recent economic releases have set a very negative scene for the manufacturing sector in the United States. In the third week of November, the ISM Manufacturing Purchasing Managers’ Index (PMI) for November came out, showing a much worse than expected drop in factory activity. This came as a surprise since economists had predicted the index would remain below the important dividing line of 50.0. If this occurs, it will be the ninth straight month of economic contraction.
A reading under 50 would indicate that activities in the manufacturing sector are shrinking, potentially shaking confidence in the USD. The disappointing PMI data bolsters the case for at least one more interest rate cut by the Federal Reserve this year. Thus, as the US central bank weighs its monetary policy alternatives, the market is on edge about any risks to the USD’s bullish momentum.
Canadian Labor Market Outlook
Analysts expect a tepid Canadian labor market in tomorrow’s employment report. This is in sharp relief to the turnstile US economic soothsaying. The unemployment rate is expected to have jumped back up to 7% in November, from 6.9% in October. This modest uptick might just reflect other economic pressures, but there is more to consider. It certainly doesn’t need to mean the sky is falling on Canada’s labour market.
The positive message to take from this is that despite impending challenges, Canada’s labor force has held up well and continues to do so overall. This stability may help to balance out volatility in the USD/CAD pair, especially as domestic and international economic conditions continue to change.
Implications for USD/CAD Traders
The complex relationship between the USD and CAD played a significant role in shaping the USD/CAD pair’s price action. Despite such poor economic data, the US Dollar has bounced sharply in recent weeks. This trend will provide welcome tailwind for the traders looking at this currency pair. Yet just below the surface, continued worries about what future Federal Reserve interest rate reductions might mean still bubble up.
As these influences all come together, traders should continue to be cautious about major economic releases and any central bank statements or actions. More hawkish or dovish outcomes for each currency are possible, depending on upcoming data, setting the trajectory of the USD/CAD pair.