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USD/CAD: Loonie softens despite strong Canadian manufacturing data

H.S. Borji
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USD/CAD: Loonie softens despite strong Canadian manufacturing data

Strong manufacturing data weren’t enough to lift the Canadian dollar Monday, as the markets awaited a speech from Bank of Canada Governor Stephen Poloz later in the day.

The loonie, as the Canadian currency is known, declined 0.4 percent to 0.8832 US. The loonie pared its gains Friday after the Canadian economy contracted unexpectedly in August.

The USDCAD pair advanced 0.4 percent to 1.1323. The pair is likely to face resistance at the 1.1340 level. On the downside, support is descending from 1.1186.

In economic data, Canada’s manufacturing industry rose to an 11-month high in October, as new order volumes surged to their highest levels since November 2013.

The Royal Bank of Canada’s gauge of Canadian manufacturing activity advanced 1.8 percentage points to 55.3. A reading above 50 is a sign of growth in manufacturing activity, whereas a reading below that level denotes contraction. Canada’s manufacturing industry has been at or above the 50 level that separates expansion from contraction since April 2013.

RBC is Canada’s largest commercial bank by market capitalization and second largest by total assets. Its monthly PMI survey is based on a survey of approximately 400 industrial companies operating throughout Canada.

“We saw a strong uptick in Canada’s manufacturing business conditions in October driven by new order growth,” said RBC senior VP and chief economist Craig Wright in a statement. “Despite the challenges we are seeing in the European and emerging markets, the continued recovery of the U.S. economy should continue to support Canadian exports going forward.”

The manufacturing data had little impact on the Canadian dollar, as the markets shifted their focus to Poloz, who will be making his first speech since the BOC released its quarterly Monetary Policy Report last month. The BOC is expected to maintain loose monetary policy for an extended period in an effort to narrow the output gap in the Canadian economy.

Canada’s economy, which grew faster than forecast in the second quarter, faced strong headwinds in third quarter due largely to declining oil prices. According to Poloz, weak oil prices could shave a quarter percentage point off Canadian GDP next year. In the BOC’s view, Canada needs to grow more than 2 percent annually to close the output gap.

Meanwhile, US manufacturing activity rebounded sharply in October, rising to the highest level since March 2011 on the strength of rising new orders and higher production levels.

The Institute for Supply Management’s gauge of US manufacturing activity rose in October to 59.0 from 56.6. Economists forecast a slight decline to 56.2.

Sixteen of the 18 manufacturing industries reported growth in October, led by plastic and rubber products, textile mills, and fabricated metal products. A total of 14 industries reported higher levels of new orders in October, ISM data showed.

“Holiday orders are exceeding seasonal forecasts. Customers are demanding additional quantities above prior orders. Fuel costs and other positive signals appear to be creating demand above normal,” said one manager from the food, beverage and tobacco products industry.

ISM will release its monthly services PMI report on Wednesday.

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