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Canadian Dollar Recovers from 3-Month Low as Trade Surplus Improves

H.S. Borji
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Canadian Dollar Recovers from 3-Month Low as Trade Surplus Improves

The Canadian dollar rebounded from a three-month low against its US counterpart Wednesday, as exports continued to climb amid geopolitical tensions.

The loonie, as Canada’s currency is called, advanced 0.23 percent to 0.9144 US, a session high. The loonie tumbled more than half a percent to 0.9110 US on Tuesday, as weak oil prices and a surging US dollar kept demand for the Canadian currency subdued.

Also weighing on the Canadian dollar on Tuesday was weak services data from China. Services output from the world’s second largest economy fell into neutral territory last month, as a cooling property market weighed on business activity.

HSBC’s gauge if Chinese service activity tumbled in July from 53.1 to 50.

The Canadian dollar has tumbled 3 percent since its July 3rd high, highlighting the currency’s vulnerability to domestic uncertainty and a bullish US dollar.

The USDCAD pair tumbled 0.28 percent to 1.0930. Initial support is located at 1.0917 and resistance at 1.0991.

The loonie recovered against the euro, which reacted negatively to a sharp fall in German factory orders. The EURCAD tumbled 0.41 percent to 1.4599. The pair is testing initial support at 1.4601. On the upside, resistance is likely found at 1.4684.

The loonie rebounded against the British pound, as the GBPCAD declined 0.58 percent to 1.8392. Initial support is located at 1.8331 and resistance at 1.8559.

The Canadian dollar was little changed against the Japanese yen, as the CADJPY edged up 0.03 percent to 93.62. Initial support is located at 93.32 and resistance at 93.99.

The loonie’s gains were hampered by risk aversion in the financial markets after investors learned Russian troops were being deployed near the Ukrainian border. Russian President Vladimir Putin also told his government to prepare counter measures against sanctions that have been levied by the US and European Union.

Meanwhile, a three-day ceasefire between Israel and Hamas was holding Wednesday ahead of negotiations in Cairo between Palestinian and Israeli delegations. The two sides are reportedly seeking a long-term deal that would end the violence in Gaza that has resulted in the death of more than 1,800 Palestinians in the heavily populated strip.

In economic data, Canada’s trade surplus in June rose to its highest level in two-and-a-half years, as crude exports hit a record high.

Canada’s trade surplus more than tripled in June, rising from CAD $576 million to CAD $1.86 billion, Statistics Canada reported today in Ottawa. Economists forecast a flat trade balance at the end of the second quarter.

The June surplus was the biggest since December 2011.

The surplus was supported by a stronger than forecast rise in exports, which climbed 1.1 percent to CAD $45.2 billion.

Meanwhile, imports tumbled 1.8 percent to CAD $43.34 billion.

Energy exports surged 2.5 percent to CAD $11.9 billion. Exports of crude oil and crude bitumen rose 2.8 percent to a record high of CAD $8.9 billion, official data showed.

Exports of metal and non-metallic mineral products increased 9.7 percent in June, as volumes rose 10.2 percent.

Exports of consumer goods, which have trended upward since November 2012, advanced 8.3 percent on higher volumes.

Motor vehicle exports declined 6.3 percent after four consecutive months of growth, as demand for passenger cars and light trucks subsided.

Exports to countries other than the United States increased 4.8 percent to CAD $11.1 billion, led by the European Union.

Meanwhile, the Commerce Department said today the US trade deficit narrowed to a five-month low in June, led by a sharp decline in petroleum imports.

The US trade deficit in June shrank from US $44.66 billion to US $41.54 billion. Economists forecast the deficit to rise slightly to US $44.7 billion.

June’s trade deficit was smaller than what the Commerce Department had assumed in its advance estimate of second quarter growth. This suggests the US economy expanded at a faster rate than the initial estimate suggests.

The government said last week the US economy grew at an annual rate of 4 percent in the second quarter, exceeding forecasts.

Commodity prices rebounded Wednesday. West Texas Intermediate for September delivery climbed 22 cents to $97.60 a barrel. Global benchmark Brent crude rose 44 cents to $105.05 a barrel.

Gold for December delivery advanced 1.85 percent to $1,309.10 an ounce. Spot gold edged up 1.3 percent to $1,305.54 an ounce.

Canada’s mixed recovery so far this year has supported the central bank’s decision to keep interest rates at near-record lows. The Bank of Canada is relying on exports to drive the recovery and believes a stronger US economy, combined with a weaker loonie, could help boost demand for Canadian goods and services.

The United States is by far Canada’s biggest trade partner, accounting for three-quarters of Canada’s export market.

The BOC has “talked down” the Canadian currency at several rate announcements this year. Central bank Governor Stephen Poloz has also stated the recent surge in consumer prices was due to temporary factors such as higher energy costs.

Canadian inflation continues to defy expectations, having risen 2.4 percent in the 12 months through June. That was the biggest increase in two years. Consumer inflation levels have met or exceeded the central bank’s target of 2 percent for three consecutive months.

Looking ahead, Statistics Canada will report on building permits Thursday.

Authorizations for building projects are forecast to have declined 2 percent in June following a surge of 13.8 percent the previous month.

The Richard Ivey School of Business will also release its monthly PMI on Thursday. The index is expected to show a strong rebound in business activity in July.

The loonie’s most volatile event of the week comes Friday when StatsCan releases July employment figures. The Canadian economy is forecast to have added more than 20,000 jobs last month, as the unemployment rate fell from 7.1 percent to 7 percent.

Canadian employment levels declined 9,400 in June, as a sharp fall in part-time employment offset a strong increase in full-time work. Canada has failed to put together back-to-back months of positive employment growth this year.

Compared to June 2013, employment increased just 0.4 percent.

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