Canadian Business Activity Slumps in December, USDCAD Bounces

According to the Ivey Purchasing Managers Index, business activity in Canada contracted for the first time in seven months. The official consensus was looking for a marked decline from November’s 55.9 reading to 52.0. The actual drop however would be much more severe. The third consecutive drop for the indicator would also be the sharpest in over a year with a 7.5 point drop to 48.4. Considering not only the importance of this sector on the economy’s recovery but the relative level of the Canadian dollar as well, this data clearly undermines the foundation of a bullish fundamental outlook.

Looking more closely at the details of the report, we see that all of the component indicators were weaker or underperforming. Both supplier deliveries and prices eased (the former matched a year low and the latter hit a 10-month low). Even those figures that showed month-over-month improvement were still notably below the all-important 50.0 expansionary/contractionary level. The inventory figure stands at 42.2; but what we should really be monitoring is the employment component. This figure jumped 6.6 points from November; but at 49.2, it would nonetheless point to a majority of business leaders looking to trim their payrolls. This is particularly interesting considering we have Canadian labor data for December due tomorrow.

For impact, this data is certainly discouraging and the Canadian dollar reacted almost immediately. However, the lasting influence is likely to be limited. This is just a drop in the bucket when it comes to forecasting long-term growth and interest rate forecasts; and the sector itself has not yet fallen back into a meaningful slump. What’s more, the presence of heavy event risk on Friday will help anchor volatility. Nonetheless, loonie traders should keep this data in the back of their mind for their medium-term USDCAD forecasts.