The Canadian dollar was under pressure in early trading yesterday morning. However, weaker-than-expected U.S. Institute for Supply Management Manufacturing Purchasing Managers Index data (Actual 49.1 vs forecast 51.0) changed that. The U.S. dollar fell across the board and the loonie went along for the ride.
The ISMstatement said: "Comments from the panel reflect a notable decrease in business confidence. August saw the end of the PMI expansion that spanned 35 months, with steady expansion softening over the last four months. Demand contracted, with the New Orders Index contracting, the Customers' Inventories Index recovering slightly from prior months and the Backlog of Orders Index contracting for the fourth straight month.
"Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders. Respondents continued to note supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month declined and reached its lowest level in 2019."
Wall Street was already wobbly because of the new China and U.S. tariffs. The ISM data tipped it over the edge. The Dow Jones Industrial Average fell 285 points to close at 26,118.02. The NASDAQ closed with a loss of 1.11% and the S&P 500 lost 0.69%.
The weak data and the stock market retreat got President Trump’s attention. He tweeted (but it didn’t have any impact), "We are doing very well in our negotiations with China. While I am sure they would love to be dealing with a new administration so they could continue their practice of 'ripoff USA' ($600 B/year),16 months PLUS is a long time to be hemorrhaging jobs and companies on a long-shot...And then, think what happens to China when I win. Deal would get MUCH TOUGHER! In the meantime, China’s Supply Chain will crumble and businesses, jobs and money will be gone!"
USD/CAD touched $1.3380 ahead of the ISM report and dropped, finding a bottom at $1.3325. Canadian dollar support from better than expected domestic data has been robust but fleeting in the past few weeks. Today’s Bank of Canada (BoC) monetary policy statement is not likely to change its performance.
The BoC is widely expected to leave Canadian interest rates unchanged at 1.75%. The statement may drop broad hints that rates will be cut at the October meeting. The July statement said “the outlook was clouded by persistent trade tensions.” Those trade tensions worsened in August. The U.S. Fed, Reserve Banks of Australia and New Zealand have all cited trade tensions to justify rate cuts. Why should the BoC be different?
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
