In the USDCAD, spot was approaching the apex of a consolidation trend by mid-session in New York. In the Asian and European sessions action was confined around a solidifying resistance level of 1.1340. An impromptu rally in the loonie around 7:15 GMT allowed for the biggest swing in the pair since yesterday’s active North American session hours. The 50 point run ran out of steam quickly however, and a quick return to 1.1340 resistance further put traders on their gaurds.
While there were no knee-jerk reactions to economic releases for the day, there was plenty of contemplation over the future of the Canadian dollar. On the one hand, there were crude prices that, around 14:00 GMT, broke above the unthinkable $76 per barrel mark. On the other hand, today’s report from the Bank of Canada were offering gloomy predictions for future economic growth while taking the possibility of a rate hike off the table. Beginning with the positive, the Canadian unit has held a strong correlation with the change in crude prices for three years running. As tensions of a nuclear Iran, missile testing North Korea and what some are calling open war between Israel and Palestine rise, crude oil is very easily propped to record highs on fears that the conflicts could spill over onto supply lines. The speculation in the energy market however is just that, speculation. Much of the run up crude prices have held in the past year was driven by speculators and not from the more natural influences of hedging and commercial supply and demand. Another quirk of more expensive crude is the level where the bill paid by Canadian consumers and factories begins to outpace the benefit to exporters and slows the economy. This may already be happening according to the BoC’s report released today. The central bank said growth will moderate because of the “lagged effects of the higher Canadian dollar.” And dropping the hammer any further tightening to interest rates, the BoC’s Dodge said, “The current level of the policy rate is judged…to be consistent with achieving the inflation target over the medium term.” While the broad market mulls over which is more important for trading, some economic fodder will keep traders occupied tomorrow. On the schedule is Canadian manufacturing shipments, which are expected to rebound into positive territory for May.
Canadian shares were softer for the second day as growth concerns added to firms’ fears that higher energy prices will cut into third quarter revenues. The benchmark SP/TSX plunged 147.77, or 1.26% to 11,623.30 by 18:30 GMT. Recent gains in the financial sector were reversed by doubts of economic growth. The nation’s largest insurer, Manulife Financial Corp., saw shares drop C$0.50 to C$36.18. Perpetual headliner Research in Motion also made the movers list by falling C$1.95 to C$73.57. Not even raw material producers could rally on the potential higher revenues from their product. Gold giant, Barrick Gold shares trading down C$0.80 to C$33.46 while those of natural gas producer EnCana Corp. fell C$1.13 to C$57.56.
Government debt was little changed for the day as bond traders interpreted the long-term picture for the economy. Ten year maturity paper was up a slight 0.03 percentage points to 100.35 of face while yields were unchanged at 4.45 by 18:30 GMT.