THE TAKEAWAY: April US Factory Orders > Deeper Contraction in March, Unexpected Contraction in April > USDCAD Bullish

Since the poor labor market reading for May was released on Friday, speculation has been rampant that the Federal Reserve would implement a third round of easing. Policymakers have said that a further deterioration in the United States’ growth picture would be necessary for another round of easing to be implemented. After today’s data from the US, we can say that policymakers have another piece of information to suggest that more easing is necessary.

US Factory Orders contracted by 0.6 percent in April, following a revised 2.1 percent contraction (1.5 percent initially reported) in March. According to a Bloomberg News survey, Factory Orders were expected to have expanded by 0.2 percent. The two months of consecutive declines mark the first such occurrence of two consecutive months of declines since February-March 2009, when Factory Orders contracted by 0.7 percent and 2.7 percent, respectively.

The poor reading comes after an equally disappointing ISM New York report for May, which showed that the diffusion index declined to 49.9 from 61.2 in April. Mainly this significant downturn comes from the Employment subcomponent, which declined to 48.4 from 53.8, breaking three consecutive months of readings above 50.0, the growth/contraction dividing line.

USDCAD 1-minute Chart: June 4, 2012

Canadian_Dollar_Slides_Following_Contraction_in_April_US_Factory_Orders_body_Picture_1.png, Canadian Dollar Slides Following Contraction in April US Factory Orders

Charts Created using Marketscope – Prepared by Christopher Vecchio

The poor US production data has raised concerns among the US’ largest trading partners, such as Canada, and as a result, the Canadian Dollar has taken a hit across the board following the two releases. The USDCAD rallied up from 1.0380 ahead of the ISM New York release to as high as 1.0409 after the Factory Orders report, while the CADJPY dropped from 75.28 to 75.11. The EURCAD was perhaps the best performer after the releases, rallying up from 1.2958 to 1.3000.

Like the relationship the Australian economy has with China, the Canadian economy’s performance is largely tied to the United States. That is to say that, like strong Chinese data is bullish for the Australian Dollar, strong American data is bullish for the Canadian Dollar; and vice-versa. In this case, poor US production data bodes poorly for the Canadian economy, with major concerns rising that trade between the two North American economies will begin to slowdown.

--- Written by Christopher Vecchio, Currency Analyst

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