USD/CAD: Canadian Manufacturing to Fall into Contraction

The US dollar is higher against the Canadian dollar on Monday morning as forex markets position for manufacturing data from the United States and Canada later. Across wider markets there is a mixed tone with Chinese shares having dropped significantly after returning from a Lunar New Year break, while shares in Europe have opened higher.

USD/CAD was higher by 16 pips (+0.12%) to 1.3251 with a daily range of 1.323 to 1.325 as of 9.30am GMT. The currency pair had a choppy start to the day but has gone to reach the highest level since early December 2019.

USD/CAD – The US dollar gained 0.71% last week as risk appetite waned

The developments in China are being closely scrutinised with concern about the spread of the coronavirus overseas underlining demand for the US dollar. The US dollar gained 0.71% against the Canadian last week as risk appetite waned, creating demand for havens like the dollar while weaker oil prices were detrimental to the Canadian dollar. That marks the 4^th successive weekly gain for the USD/CAD exchange rate.

The Federal Reserve kept US interest rates on hold at its meeting last week but chose to emphasise the problem of persistently low US inflation and the potential risks for the coronavirus. That has led markets to suspect the next move from the Federal Reserve could be to lower interest rates.

Canadian dollar

While the Federal Reserve may have turned slightly more dovish, comparatively a rate cut looks even more likely, perhaps as soon as February from the Bank of Canada. The BoC opened the door to a rate cut at its last meeting, blaming the persistent slowdown in part brought about by global trade tensions, as well as the uncertainty created by the end of NAFTA and the creation of the USMCA. The latest bit of data from Canada was more optimistic with GDP rising 0.1% m/m in December, better than expectations of a -0.1% drop.

The Markit Manufacturing PMI for Canada is released at 14:30 GMT and is expected to show a reading of 49.6, down from 50.4 in December. A reading below 50 means the sector is in contraction.

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