Fundamental Forecast for Canadian Dollar: Neutral

- Unemployment in June unexpectedly fell to 7.9% from 8.1% the month prior
- Ivey PMI unexpectedly declined to 58.9 from 62.7 missing forecasts of 63.5

The Canadian dollar erased all of its losses from the week prior as fading concerns over the global economy and a robust employment report led to a 400 pip turnaround. The Canadian economy added 93,200 jobs in June, lowering the unemployment rate to 7.9% from 8.1%. Economists were forecasting job growth of 20,000 suggesting that the domestic growth is accelerating faster than expected. The country became the first of the G-7 to recoup jobs lost during the recession justifying the BoC taking the lead in raising interest rates. The improving labor market should translate into consumer consumption with higher demand leading to rising prices. Inflation is a primary concern for policy makers and the prospect of accelerating price growth could lead to a second rate hike at their upcoming July 20th meeting.

It is not a given that the central bank will raise rates as Governor Carney in recent statements has but a greater emphasis on global factors in determining future monetary policy. Additionally, domestic fundamental releases on the week weren’t all positive as the Ivey PMI reading for June unexpectedly fell to 58.9 from 62.7 with building permits dropping 10.8% in May. The slower pace of expansion in the manufacturing sector should be a concern as demand from emerging markets has fueled the economic recovery. Looking at the break down we see that the employment component slipped to 53.6 from 58.1. Employers may be lowering their level of hiring in anticipation of a slower global economy. Indeed, nearly half of the job growth in June was attributed to part-time workers, which can be easily shed. The sharp fall in applications for new construction will also be a concern for the BoC and may be another sign that activity is slowing.

The upcoming economic calendar is comparatively light to the past week with International Merchandise trade and leading indicators highlighting. Forecasts are for a trade deficit on the month which could be a product of strengthening domestic demand or weaker exports. If it is the latter then we could see yield expectations falter leading the “loonie” to give back some of its gains. Adding to the case for a slowdown in demand from abroad is the forecast of a 0.5% decline in manufacturing sales in May. The leading indicator which forecasts growth over the next three to six months is expected to rise by 0.7% which could offset export weakness. Ultimately fundamentals may take a back seat to broader trends which have a greater influence on oil prices which continues to hold a 63% correlation with the USD/CAD. Crude struggled to hold onto gains today which could be a sign that support is waning. Also, a looming BoC rate decision could generate support with expectations of a rate hike, or leave trades on the sidelines if the future monetary policy gets cloudy.

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