Canada Dovish; US Data Disappoints

Last updated 10/20/2009 9:15 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

US economic data printed softer than expected today with headline PPI numbers contracting a sharper than expected -0.6% versus 0.1% eyed while housing starts rose only a modest 0.5% to 590K versus 610K eyed. The drop in producer prices was the result of lower energy costs – a trend that could reverse itself if oil prices remain above the $80/bbl level for a sustained period of time.

Meanwhile the housing data proved to be a disappointment as three out of the four regions showed month over month declines with only the South seeing an increase in starts as volume rose 7.1%. After hitting a multi-year low in April of 479K, housing starts have rebounded to stabilize at the current 590K unit rate. Although conditions for the sector have clearly improved the pickup in demand remains lackluster despite 30 year mortgage rates that remain below 5%.

The news took the wind out the risk rally in FX as EUR/USD dropped 30 points in reaction to the data. The pair has tried to breach the 1.5000 barrier several times during the night but has failed to do so coming within 5 pips of the target. Nevertheless, the positive earnings surprises this morning could provide enough fuel to push the pair through that level as US equities markets open for trade.

Meanwhile the Bank of Canada left rates unchanged at record low of 25bp Although the BOC recognized that signs of recovery are beginning to be seen in the Canadian economy, it stated that the persistent strength In the Canadian dollar “more than fully offsets” the favorable developments since July.

Unlike the hawkish RBA the BOC remains resolutely dovish in its monetary policy as it tries to avoid the move to parity in USD/CAD. Unlike Australia which so far has seen little negative impact from its appreciating currency, Canada is highly sensitive to the impact of exchange rates on its trade with US which remains its largest trading partner. Thus while the Canadian economy appears to be recovering at faster pace than its much larger neighbor down South, the BOC may remain stationary longer than normal given the persistent strength of the loonie.  USD/CAD& nbsp;rose to 1.0380 as the result of this dovish statement.

Comments (3)

arete11

October 20, 2009 at 09:22 AM ET

Hi Boris,
I see the acronym "ACB" buyers or sellers on the newswires and I believe you have used the term in the past. Would you explain what it means? Also, the term "RHS fixing. Thanks, and thanks also for your insightful daily commentaries.

bschlossberg

October 20, 2009 at 09:28 AM ET

I posted response on the other article

Swapinfutures

October 21, 2009 at 04:09 PM ET

With how much transparency will the fed hike interest rates in the upcoming year? Can we expect to see something similar to Greenspan's post tech bubble/9/11 rate hikes in which we knew it would be 25 basis points each meeting?

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.