Canadian Dollar Gains As Manufacturing Sales Improve in May

Canadian Dollar Gains As Manufacturing Sales Improve in May
July 16, 2020

 

The Canadian dollar gained against the greenback yesterday following the release of better than anticipated manufacturing sales data for May. The loonie’s gain was also aided by the Bank of Canada’s decision to leave the benchmark interest rate unchanged at 0.25% and a sharp decline in the US crude oil inventories. Canada, being a crude exporter, is expected to benefit from the crude oil rally. Even though the US Empire State Manufacturing Index and industrial production data were better-than-expected, the market gave importance to crude oil inventories and positive results (interim) from Moderna’s COVID-19 vaccine trial. As the market switched to risk-on mode, commodity currencies such as the Canadian dollar started appreciating. In the past 24 hours, the USD/CAD pair has declined from a high of 1.3627 to a low of 1.3530.

According to Statistics Canada, manufacturing sales rose 10.7% m-o-m in May, following a decline of 27.9% in the earlier month and better than Consensus estimates of 9.2%. In value terms, manufacturing sales increased to $40.20 billion in May as several manufacturers restarted business operation following total or partial shutdown enforced to contain the spread of COVID-19. However, compared to February, total manufacturing sales in May were 28.4% lower.

Of the 21 business sectors, sales increased in 18. Motor vehicle parts and petroleum and coal products industries led the sales. In volume terms, manufacturing sales increased by 8.8.

Following the monetary policy meeting, Bank of Canada Governor Tiff Macklem announced that the central bank has decided to maintain its benchmark interest rate at 0.25% to manage the “extremely uncertain” economic outlook due to the COVID-19 outbreak, and intends to keep the interest rate unchanged until the overall economic scenario shows an improvement. Notably, the interest rate has stood at 0.25% since March. The bank further stated that it anticipates the economy to shrink 7.8% in 2020, primarily due to a 14.6% y-o-y contraction in 2Q 2020.

The report also forecasts an annual inflation rate of 0.6% in 2020, 1.2% for next year, and 1.7% in 2022. The central bank’s inflation target is 2%, which will be maintained until the target is attained.

In the US, data published by the Federal Reserve Bank of New York indicated that the Empire State Manufacturing Index increased to 17.20 in July, from the negative 0.20 in the earlier month. Economists had anticipated a reading of 10. It is the first positive reading since February. While order backlogs remained unchanged, fresh orders and shipments recorded an increase.

The general business conditions index increased above zero to 17.20, reflecting the third successive monthly rise. The new orders index increased 15 points to 13.90, implying an increase in orders. Likewise, the shipments index rose 15 points to 18.50. The average workweek index increased nine points to -2.6, underlying a slight decrease in hours worked.

Notably, the index for future business conditions decreased 18 points to 38.40, implying that firms are less optimistic about future business conditions, compared with June. The index for future new orders and shipments remained almost unchanged at 40.

Interestingly, the index for future employment increased to 21.10, suggesting that companies anticipate increasing hiring in the upcoming months. Likewise, the capital expenditure index also increased to 9.10, signaling that companies are planning to increase capital spending.

In a separate news report, the Bureau of Labor Statistics stated that import prices increased 1.4% m-o-m in June, after rising 0.8% in the earlier month. Economists had anticipated the import prices to increase by 1%. It was the most substantial monthly increase since the index grew 1.4% in March 2012.

The Federal Reserve also stated that industrial production increased by 5.4% m-o-m in June, compared with a 1.4% increase in the earlier month. Economists had anticipated an industrial production growth of 4.5%.

Notably, the capacity utilization rate increased to 68.6% in June, from 65.1 in May, and better than the market’s expectation for a 67.9% increase.

In the US, the Energy Information Administration (EIA) has stated that crude oil inventories fell by 7.5 million barrels in the week ended July 11th. In the earlier week, crude oil inventories increased to 5.70 million barrels. Economists had anticipated crude inventories to decline by 1.30 million barrels.

WTI (West Texas Intermediate) crude rose 1.24% or $0.50 to close at $40.70 per barrel, following the release of crude oil inventories data. Likewise, Brent crude gained 1.31% or $0.56 to close at $43.46 per barrel.

The upbeat manufacturing sales data and an increase in crude oil prices are expected to keep the USD/CAD pair range-bound with a slight bearish bias.

The USD/CAD price chart indicates that the currency pair is facing heavy resistance at 1.3627. The next support is anticipated only near 1.3395. Additionally, the currency pair is trading below its 50-day moving average, while the stochastic indicator is in the bearish zone. Therefore, we are anticipating the USD/CAD pair to move down in the short-term.

CAD - technical analysis - 16th July 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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