FX Strategy Briefing: Canadian Dollar Gains on BOC’s Hawkish Comment

• The dollar traded mostly lower on Wednesday as European bank worries eased following a successful Portuguese debt auction. The Federal Reserve's Beige book indicated the pace of US economic growth is slowing. "Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods," the Fed said. The S&P 500 gained 7.03 to 1,098.87. The euro rose but failed to stay above the 1.2750 resistance. The USD/JPY recovered from a new cycle low. Japanese Finance Minister Yoshihiko Noda tried to talk down the yen by saying "we will take decisive steps - which of course include intervention - when it becomes necessary." The GBP/USD is close to the 1.55-area resistance. The AUD/USD is approaching the 0.92-area resistance.
• The USD/CAD fell after the Bank of Canada sounded more hawkish than expected. The BOC raised its key interest rate to 1.00% from 0.75%, as expected, and signaled further rate increases this year as the Canadian economy continues to grow. "Financial conditions in Canada have tightened modestly but remain exceptionally stimulative," the BOC said. The USD/CAD has traded sideways for most of the year. The pair has consolidated earlier gains after last week's unsuccessful attempt to penetrate the important 1.06-area resistance. If this resistance is broken, the USD/CAD will turn more bullish.

Financial and Economic News and Comments

US & Canada

• US consumer credit fell a less-than-expected $3.6 billion in July, a sixth straight monthly fall, to $2.419 trillion, after a revised $1.0 billion decline in June (vs. previously reported $1.3 billion decline), according to figures released by the Federal Reserve. July consumer credit plunged 78.0 billion from a year earlier.

• Canada's seasonally adjusted building permits fell a less-than-expected 3.3% m/m to C$6.4 billion ($6.2 billion) in July, the second decline in three months, after an upwardly revised 6.9% m/m increase in June, data from Statistics Canada showed. Building permits rose 33.0% y/y, a tenth straight year-on-year rise, following June's upwardly revised 25.4% y/y gain. The July month-on-month decline was led by a 2.4% m/m decrease in residential permits to C$3.5 billion and a 4.3% m/m drop in non-residential permits to C$2.9 billion.
• The Canadian Ivey PMI jumped to a higher-than-anticipated 65.9 in August from 54.0 in July, indicating growth in purchases in Canada's public and private sectors accelerated to the highest level since June 2008, according to data from the Richard Ivey School of Business and the Purchasing Management Association of Canada. The employment index slipped to 51.6 from July's 52.0, suggesting employment growth eased for a third consecutive month but held above 50.0 for a sixth straight month. Prices rose at a faster pace in August, with the prices index rising to 60.8 from July's 56.0.

Europe

• Germany's seasonally adjusted exports fell 1.5% m/m to €82.2 billion ($104.6 billion) in July, the first fall in three months, after a downwardly revised 3.7% m/m gain in June, data from the Federal Statistical Office showed. Seasonally adjusted imports decreased 2.2% m/m to €69.5 billion, the first decline since April, following June's downwardly revised 1.6% m/m increase. Exports rose 18.7% y/y in July and imports rose 24.9% y/y; both posted their sixth successive year-on-year rises. The trade surplus narrowed to €13.5 billion in July from an upwardly revised €14.2 billion in June. The current-account surplus shrank to €9.0 billion from June's downwardly revised €12.7 billion.
• Germany's seasonally adjusted industrial production increased a less-than-expected 0.1% m/m in July, the fourth gain in five months, after a 0.6% m/m decline in June, according to data from the Federal Ministry of Economics and Technology. Industrial production rose 10.9% y/y nsa wda, a seventh straight year-on-year gain, following June's downwardly revised 10.7% y/y rise.

• UK industrial production increased a marginally less-than-expected 0.3% m/m in July after a 0.5% m/m decline in June, data from the Office for National Statistics showed. Industrial production rose 1.9% y/y, a fifth successive year-on-year rise, following June's 1.3% y/y increase. Manufacturing production was up 0.3% m/m in July, a third consecutive monthly advance, after increasing at the same pace in June. Manufacturing production grew 4.9% y/y, a sixth straight year-on-year gain and the largest since December 1994, following June's downwardly revised 4.0% y/y rise.

Asia-Pacific

• The Japanese current conditions index unexpectedly declined to 45.1 in August from 49.8 in July, indicating Japanese merchant confidence fell to the lowest level since February, according to the Cabinet Office's latest economy watchers survey. The future conditions index decreased to 40.0 from July's 46.6.

FX Strategy Update

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