Softening Growth Erodes the Canadian Dollar

The Canadian dollar tumbled in the forex market, early in the week, and yields declined after the shift to a trade deficit in February, which supported Governor Poloz’s cautious view of Canada’s growth outlook. The currency pair USD/CAD surged higher, as the 2-year has pulled back to 3-basis points following the data.

Canadian statistics reported that Canada ran a 1.0 billion Canadian dollar deficit in February following a downwardly revised $0.4 billion surplus in January which was 0.8 billion Canadian dollars. The shift to a deficit was contrary to expectations for a modest trimming of the surplus. Exports values plunged 2.4%, with declines widespread across sectors. Exports excluding energy products were also 2.4% lower. Canada is an export-driven economy, which means that this decline is subtracted from growth.

Import values improved 0.6% in February, although 7 out of 11 sectors saw declines. A pick-up in special transactions trade, motor vehicles and parts, and farming and fishing products drove the gain in total imports. The trade surplus with the U.S. widened to $4.5 billion from 4.4 billion Canadian dollars. The shift from a deficit following 3-consecutive surpluses in the trade balance underscores the cautious approach that has been taken by the Bank of Canada. Export uncertainty was one of Governor Poloz’s key talking points last week when defending his cautious view.

To make matters worse for USD/CAD bears in the forex market, the U.S. trade deficit narrowed 9.6% to -$43.6 billion in February after widening 8.8% to -$48.2 billion which was revised from -$48.5 billion in January. Imports dropped 1.8% after January’s 2.3% jump, breaking a string of 4 straight monthly gains. Exports were up 0.2% following a prior 0.8% increase which was revised from 0.6%.

interest rate effects may have been “unmeasured,” according to an SF Fed paper on Monetary Policy Medicine: Large Effects from Small Doses, which used a “randomized trials” methodology akin to medical research. Trying to control exchange rates (including floating and pegged), the paper demonstrates that “even a modest tightening cycle can have a substantial restraining effect on both inflation and economic activity.” This result could give some policymakers pause in terms of their rate hike agenda.

The first round of economic data in the U.S., for March, was mixed and seemed to barely affect the forex market. U.S. ISM manufacturing index slid 0.5 points to 57.2 in March, not as bad as forecast, after rising 1.7 points to 57.7 in February. This breaks a string of six straight monthly gains. But, the components were mixed. The employment component rose to 58.9 after dipping to 54.2 previously. New orders fell to 64.5 from 65.1, while new export orders climbed to 59.0 from 55.0. Prices paid increased to 70.5 from 68.0 and is the highest since mid-2011.

Additionally, the U.S. March Market manufacturing index declined to 53.3, following a 54.2 print in February, down from the preliminary reading of 53.4. It compares to 51.5 for March 2016. This is a third straight month of decline and is the lowest reading since September’s 51.5. The employment component declined to the lowest since August.


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