Major News This Week

Once again the central banks took centre stage last week. First the Federal Reserve—much as expected— brought nothing new to the table when it kept rates unchanged and repeated that it was ready to intervene if required. Following this tepid announcement, the pressure was on Mario Draghi, President of the European Central Bank (ECB). He had brought pressure on himself in the previous week when he had stated that the ECB was ready to do whatever it took to preserve the Euro. Unfortunately, these lofty words did not lead to concrete action, and the Euro has since slid.

In this uncertain environment and following the release of positive data in the U.S. (jobs and the ISM index), the Canadian dollar continued to rise.

Canada
Once everyone returns from the holiday on Tuesday, we can expect results for the Ivey Purchasing Managers’ Index. Housing Starts data are slated for Thursday—with a forecast of 213,000—down from the month before. The week will end with job creation figures for June. Expectations pin the figure at 10,000 new jobs, slightly higher than the 7,000 new jobs observed in May.

United States
Little news is expected south of the border this week, with Fed Chairman Bernanke making a speech on Monday and participating in a special event on Tuesday. We do not expect either of these events to produce any important announcements. The Trade Balance will be revealed on Thursday; the deficit is expected to have shrunk.

International
In international news, comments by central bankers and politicians will be under a microscope as analysts search for indications of closure on the current debates. On Wednesday, the Bank of England will publish a report on its economic forecasts. It should paint a bleak picture, given the weakness of recent indicators. On Wednesday, the Bank of Japan will announce its key interest rate, which is likely to be maintained at its current level of 0.1%. Later in the day, China will release its inflation estimate. This figure is important, as it will indicate the strength or weakness of the main engine of global economic growth. Have a good week!

The Loonie

“Find a job you like and you add five days to every week.”- H. Jackson Brown, Jr.

After a week where the Canadian dollar has experienced a surprisingly low level of volatility, there were only 42 points of variation Monday and 57 points Tuesday for example. Investors had focused their attention on the economic data to be published on last Friday. There was therefore no shortage of investors that looked forward to the release of U.S. employment figures Friday morning. Judging by the reaction of financial markets, there was probably no shortage as well of investors who were surprised by the force of the recent upswing of our southern neighbor’s labor market. Indeed, we learned that some 163k non-agricultural jobs were created during the month of July. The big surprise comes in part from the fact that it is nearly 100k jobs more than the previous month and partly because economists had expected, already with some optimism, that the total of jobs created would hover around 100k.

As we can see from the chart above, the data on Friday broke what was a well-established negative trend (blue line) that began early in this year. In fact, the U.S. job market seemed to be limping worryingly in 2012. From a Canadian perspective this could be good news for our domestic labor market (red line). Although the relationship is far from straightforward, the Canadian market appears to be under the influence of similar pressures as the U.S. market, especially since the mid-2011. This creation of some 100k more jobs than the previous month in the U.S. could bode well for Canadian workers who have seen their ranks grow by a mere 7.300 jobs in June. From a currency perspective, a comparable surge in Canadian employment would have strong repercussions on the course of the USDCAD pair. Keeping in mind that the Canadian dollar spent most of last week floating around levels approaching parity (1.0000), it would not be surprising that the Canadian employment data to be published this Friday could be the missing catalyst that would drive CAD to levels below parity.

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