USD/CAD touches two-week highs on better-than-expected US manufacturing data

The loonie, as the Canadian dollar is best known, declined to a two-week low against its US counterpart, after a report revealed the manufacturing activity in the US accelerated at the fastest pace since May 2010 last month, easing concerns over the US economic outlook.

USD/CAD hit a two-week high at 1.1093 at 13:40 GMT, after which consolidation followed at 1.1088, adding 0.08% for the day. Support was likely to be received at February 19th low, 1.0911, also the pairs weakest since January 16th, while resistance was to be encountered at February 6th high, 1.1122.

A report by Markit Economics revealed today that its preliminary PMI rose to 56.7 in February, from a final reading of 53.7 in the previous month, capping the largest advance since May 2010, while analysts predicted a decline to 53.0.

Earlier in the day, the US Bureau of Labor Statistics reported that the index of consumer prices in the country rose 0.1% in January compared to a month ago, in line with analysts estimates and after the index gained 0.2% in December. The annualized consumer price inflation came in at 1.6% last month, matching the median expert forecast and after a 1.5% increase in December. Core consumer prices, which exclude the volatile food and fuel categories also advanced 0.1% in January from the preceding month, while the annualized consumer price inflation increased at a 1.6% pace.

“Inflationary pressures are very muted,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, ahead of the report in a Bloomberg News interview. “It’s a positive for consumers’ purchasing power” and “should keep the Fed squarely focused on unemployment and growth.”

A separate report by the US Department of Labor revealed the number of initial jobless claims declined by 3 000 to 336 000 in the week ended February 15th, from a week ago, when 339 000 Americans filed for initial jobless benefits.

At the same time, the minutes of Federal Reserve Bank’s policy meeting on January 28th-29th showed that several policy makers said in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor” of continuing to pare back the central bank’s monthly monetary stimulus by 10 billion USD at each meeting.

As the rate of unemployment decreases at a faster than expected pace, even while other labor-market indicators signal weakness, bank’s policy makers agreed that it would “soon be appropriate” to revise their guidance about the time horizon of record-low borrowing costs.

Janet Yellen, in her first testimony to Congress as head of the Fed, said on February 11, the central bank will “likely reduce the pace of asset purchases in further measured steps at future meetings”, but also underscored that the recovery in the labor market in the US is “far from complete”. She also reiterated that the pace of cutting back Fed stimulus was not on a preset course.

The Federal Reserve announced in December that it will pare monthly bond-buying purchases by $10 billion, after which it decided on another reduction of the same size at the meeting on policy in January, underscoring that labor market indicators, which “were mixed but on balance showed further improvement”, while nation’s economic growth has “picked up in recent quarters.”

The central bank will probably continue to pare stimulus by $10 billion at each policy meeting before exiting the program in December, according to a Bloomberg News survey of 41 economists, conducted on January 10th.

Meanwhile, Statistics Canada reported yesterday that wholesale sales declined 1.4% to 49.6 billion Canadian dollars ($45.3 billion) in December, in comparison with a 0.4% decrease estimated by experts. November’s reading received downward revision to a 0.2% drop.

The eastern parts of Canada were hit by a severe ice storm in December, which caused power outages and left thousands of homes in Ontario, Quebec and the Atlantic provinces without electricity.

According to Bank of Montreal chief economist Doug Porter, cited by Bloomberg, the Canadian gross domestic product probably shrank in December because of the storm.

The Canadian economy is struggling to recover from an almost two-year slowdown and the latest reported data did show that the economy grew at an annualized 2.7% pace in the third quarter. However, economists surveyed by Bloomberg News predict that growth slowed to 2.5% in the fourth quarter, ahead of Statistics Canada quarterly GDP report, scheduled to be released on February 28.

Elsewhere, EUR/USD hit a session low at 1.3686 at 08:25 GMT, after which consolidation followed at 1.3697, losing 0.27% for the day. Support was likely to be received at February 14th low, 1.3674, while resistance was to be met at February 19th high, 1.3774, also the pair’s highest since January 2nd.