USD/CAD: Disappointing Factory Sales Report Continuing to Weigh on the Loonie

The Canadian dollar is deemed to maintain its weakness opposite the US dollar today as Canadian manufacturing sales registered the largest decline since the Great Recession due mainly to weaker auto production, a drop that suggests growth once again disappointed in the fourth quarter. In contrast, buoyant figures from the US economy are believed to buoy the Greenback to begin the trading week.

With the US financial markets closed for the Presidents’ Day today, economic data released last Friday are still foreseen to drive the currency trades today. Statistics Canada revealed that manufacturing sales fell 3.1 percent on a monthly basis in December, the sharpest dip since May 2009, due mainly to weaker auto production and lower sales. Sales fell in 16 of 21 industries during the month, representing 82 percent of the factory sector. The actual figure well exceeded estimates of a slight 0.4 percent fall and erased the 1.9 percent gain in November. Canadian manufacturers have been hard hit by a strong Loonie and subdued US demand for their products, and they have yet to see sales climb back to pre-recession levels.

In response to the dismal report, economists scaled back their forecasts for December and fourth-quarter growth, seemingly lending credibility to the Bank of Canada’s message last month that interest rate increases are less imminent. Indeed, the central bank’s forecast of 1 percent annualized growth in Q4 seems too optimistic. Analysts say that Real GDP in Q4 will likely be close to the bleak 0.6 percent advance in Q3, reflecting the persistent headwinds that undercut growth around the world throughout the end of last year.

In contrast, outlook for the world’s largest economy seems to be heading the opposite direction as reports showed consumer confidence rose in February to a three-year high and manufacturing in the New York area expanded for the first time since July. The University of Michigan preliminary index of consumer sentiment rose to 76.3 points this month from 73.8 points in January as increased property values and an improving jobs market buoy sentiment. Meanwhile, the Empire State Manufacturing Index jumped to 10.0 in February from -7.8 in the previous month. In a positive sign for future factory activity, an index of expectations of activity six months ahead rose to its highest level since April. Considering these, a long position is advised for the USD/CAD trades today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.