Summer may be over but the sun is shining bright on the U.S. dollar. The greenback extended its gains against all of the major thanks in part to stronger than expected manufacturing activity. Despite trade tensions and U.S. dollar strength, the manufacturing sector is performing well with activity expanding at its fastest pace in 14 years.
New orders surged, leading to increased production and employment and the prices paid index remains high after a smaller than expected pullback in August. As much as economists may worry about the repercussions of a trade war, recent data gives the Fed very little reason for concern.
The manufacturing sector is doing well and Friday’s non-farm payrolls report should show stronger job growth after last month’s disappointment. This could be a good week for the U.S. dollar especially as the technical picture coincides with the fundamental one. On a technical basis, USD/JPY broke above the 50-day SMA, paving the way for a move up to 112.
The rising dollar is one of the main reasons why we have seen the Canadian dollar sell off aggressively ahead of the Bank of Canada’s monetary policy announcement. While the BoC is not expected to change interest rates, the market is pricing in an 82% chance of a rate hike in October.
This means that if the Canadian central bank is serious about tightening, they will need to set the stage for a rate hike this week but their will to tighten is not clear given the uncertainty of trade negotiations. Don’t forget that the BoC raised rates at their last meeting in July and at the time Governor Poloz indicated that rates would need to increase further because the economy is in a good place. Since then, we’ve seen more job growth and higher inflation.
However manufacturing activity slowed, retail sales continued to fall and housing market activity weakened. Canadian and American trade talks resume on Wednesday but it could be weeks before there’s a deal. Plus President Trump hasn’t made things any easier. Over the weekend, he said in a tweet that there is “no political necessity to keep Canada in the new NAFTA deal.
If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off.” Words such as these do not suggest that he’s championing for a deal. So if there are no major changes in the BoC statement, USD/CAD could continue to march higher until there’s meaningful progress in the trade talks.
However if the BoC makes it clear in their monetary policy statement (there’s no press conference scheduled) that rates need to increase, we could see USD/CAD drop back below 1.31. We think the central bank will remain optimistic but refrain from committing to a hike.
