- USD/CAD falls to lowest since February 21 but returns to pandemic start line on Friday.
- US employment report provides boost for dollar as labor market expands.
- Initial jobless claims aid mild US dollar recovery.
- WTI stalls below $42 restraining loonie improvement.
The USD/CAD rallied on Friday’s better than expected US employment report after reaching its lowest level since late February earlier in the week. Weaker pricing for West Texas Intermediate, the North American crude standard, also put a drag on the Canadian despite the positive Employment Change report out of Ottawa.
Support at 1.3230 dates to the pre-pandemic market in mid to late February and had not been visited since then. Wednesday’s touch was brief with the pair closing at 1.3266, 1.3300 on Thursday and 1.3384 on Friday.
The US dollar slide over the past three weeks has been a USD function driven by the rising Covid case count in several states in June and July and its expected impact on the economic recovery.
Though US non-farm payrolls in July were just over one-third of the 4.8 million total in June, the headline number of 1.763 million was considerably better than the consensus forecasts which ranged between 1.48 million and 1.6 million. Given the labor market uncertainties and recent history there was no small measure of relief that that returning employment continued at a high rate.
Initial claims fell to their lowest level of the pandemic at 1.1186 in the July 31 week. As rising claims in the mid-weeks of July was the primary economic information behind the assumption of a weakening US economy their improvement set the stage for the NFP report and the jump in the dollar.
Despite the improving North American and global economic picture West Texas Intermediate (WTI, Clc1) is stalled below the $42 resistance line which had marked the pricing bottom for four years. It will be difficult for the Canadian dollar to strengthen until this major component of its economy is again profitable.
Better US data meant a higher USD at the week end largely without reference to the CAD.
Canada statistics summary August 3-August 7
Canadian July economic data was better than anticipated parallel with that south of the border.
The IHS Markit manufacturing PMI came in at 52.9 in July, far ahead of its 44.1 forecast and the June score of 47.8. The Ivey PMI seconded the Markit result registering 68.5 in July on a 57.5 prediction and June’s 58.2 result. It was the highest reading for this all-Canada survey since April 2018.
Payrolls also improved more than expected in July with the Employment Change report from Statistics Canada listing 418,500 rehired workers, better than the 400,000 forecast. Canadian firms have returned 55% of the 3.005 million employees furloughed in March and April to work. In the US the rehired rate is 42%.
The Unemployment rate dropped to 10.9% from 12.3% and the participation rate rose to 64.3% from 63.8% in June. US statistical summary August 3-August 7
US statistics summary August 3-August 7
Strong reading for purchasing managers’ indexes in July though not in the employment indexes have not yet changed the market’s negative view of the US economy but the unexpected drop in initial claims and the better than expected employment outlook were instrumental in fortifying the dollar on Friday.
It is hard to see how the level of incoming business suggested by the ISM new orders gauges, particularly the record in services, will not prompt substantial hiring in August.
Looking ahead the claims numbers will again take center stage. If they continue to drop, then the market will soon be convinced that the July Covid slowdown is over.
Manufacturing PMI from the Institute for Supply Management was 54.5 in July better than both the forecast of 53.6 and the June reading of 52.6. New orders jumped to 61.5 from 56.4, reversing the 46.8 prediction. Prices paid rose to 53.2 in July from 51.3.
Construct spending for June fell 0.7% on a -0.5% estimate and June 1.7% drop.
Factory orders rose 6.2% in June following May’s 7.7% increase.
Private payrolls from ADP at 167,000 were far weaker than the 1.5 million prediction but had no predictive value for NFP.
Services PMI registered 58.1 in July after June’s 57.1. The forecast was 55. New orders soared to 67.7 and all-time record. Employment stayed in contraction at 42.1 down from 43.1 in June. Price paid fell to 57.6 in July from 62.4.
Initial jobless claims fell to 1.186 million in the July 31 week, well below the 1.415 million forecast. It was the first decline in three weeks and the lowest level since the pandemic layoffs began in late March. Continuing claims slipped to 16.107 million from 16.951 million. The four-week moving average for claims decreased to 1,337.75 from 1,368.75
Non-farm payrolls in July added 1.763 million positions, 1.6 million had been forecast and 4.8 million were created in June. The unemployment rate (U-3) fell to 10.5% from 11.1% and the underemployment rate (U-6) dropped to 16.5% from 18.0%. Average hourly earnings rose 0.2% on the month and 4.8% on the year. Average weekly hours rose 0.1 to 34.5 and the labor force participation rate dropped to 61.45 from 61.5%.
The Canadian dollar is not master in its own house. Perceptions and reality on the US economy are dictating direction in the USD/CAD. The current but perhaps waning scenario has the US recovery in serious straits from the second wave of the Covid virus.
There are good reasons to doubt the accuracy of that picture. Caseloads, hospitalizations and fatalities in the in the affected states have been declining rapidly. The forward looking new orders indexes in manufacturing and services were very strong in July. The labor market is the crux of the economic situation and new business equals new hiring.
If US statistics continue to improve the USD/CAD will follow them higher. The area between 1.3400 and 1.3625 was well traded from the second week of June unitl the third week of July and offers plentiful resistance lines. The area below 1.3330 is similar though the support come from the pre-pandemic ranges from June 2019 through March 2020.
Canada statistics August 10- August 14
US statistics August 10-August 14
USD/CAD technical outlook
The relative strength index rose sharply on Friday and at 44.51 is at its highest in three weeks. The moving average have diverged with the 21-day at 1.3442 supporting resistance at 1.3450. The 200-day at 1.3529 provides minor resistance betweenthe lines at 1.3500 and 1.3575. The 100-day at 1.3773 is out of the current picture.
Resistance: 1.3450; 1,3500; 1.3575; 1.3625; 1.3700
Support: 1.3330; 1.3230; 1.3200; 1.3140; 1.3085; 1.3040
USD/CAD sentiment poll
The Friday surge in USD/CAD has neutered last week's immdediate bullish forecast but the longer views remain higher with the lower farther forecast inticating there is as yet no developing trend.
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