Canadian Dollar Drops as Manufacturing PMI Misses Expectations
The Canadian Dollar (CAD) started the week on a lower note after May’s S&P Canadian Global Manufacturing Purchasing Managers Index (PMI) figures fell short of expectations. Similarly, the US ISM Manufacturing PMI also missed the mark, creating a situation where both the Canadian Dollar and the US Dollar (USD) were vying for the less favorable position in the currency markets.
Manufacturing PMI Woes for Canada
For 13 consecutive months, Canada’s manufacturing PMI has been below the crucial 50.0 threshold, indicating a sustained contraction in the sector. The May reading slipped to 49.3 from 49.4, missing the forecasted rise to 50.2. This underperformance reflects ongoing struggles within the Canadian economy, with industry leaders grappling with persistent challenges.
Bank of Canada Rate Decision Looms
Traders are now eagerly anticipating the Bank of Canada’s (BoC) rate decision on Wednesday. Market sentiment leans towards a rate cut, with a Reuters poll revealing that 22 out of 29 economists expect a 25-basis-point reduction. Such a move would be a response to the economic slowdown, aiming to stimulate growth.
Comparative Weakness in the US Dollar
In the United States, the ISM Manufacturing PMI for May also disappointed, dropping to 48.7 from 49.2, against an expected increase to 49.6. This downturn has contributed to the weakening of the USD, although the Greenback managed to perform slightly better than the CAD on the day.
Key Market Movers
- S&P Canadian Manufacturing PMI: Eased to 49.3 from 49.4, below expectations.
- ISM US Manufacturing PMI: Fell to 48.7 from 49.2, missing forecasts.
- Bank of Canada Rate Decision: Markets anticipate a 25-basis-point cut.
- ADP Employment Change: Scheduled for Wednesday, providing a precursor to Friday’s US Nonfarm Payrolls (NFP) report.
- Canadian Labor Figures: Due Friday, expected to be overshadowed by the US NFP release.
CAD Performance Against Major Currencies
On Monday, the CAD displayed broad weakness, particularly against the Japanese Yen (JPY) and Swiss Franc (CHF), where it declined by approximately 1%. The CAD’s performance relative to other major currencies is detailed below:
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.36% | -0.34% | -0.76% | 0.11% | -0.24% | -0.61% | -0.91% | |
| EUR | 0.36% | 0.05% | -0.41% | 0.46% | -0.01% | -0.25% | -0.56% | |
| GBP | 0.34% | -0.05% | -0.38% | 0.42% | 0.01% | -0.36% | -0.62% | |
| JPY | 0.76% | 0.41% | 0.38% | 0.83% | 0.55% | 0.29% | 0.00% | |
| CAD | -0.11% | -0.46% | -0.42% | -0.83% | -0.38% | -0.72% | -1.03% | |
| AUD | 0.24% | 0.00% | -0.01% | -0.55% | 0.38% | -0.25% | -0.58% | |
| NZD | 0.61% | 0.25% | 0.36% | -0.29% | 0.72% | 0.25% | -0.36% | |
| CHF | 0.91% | 0.56% | 0.62% | 0.00% | 1.03% | 0.58% | 0.36% |
Technical Analysis: CAD Faces Continued Pressure
The CAD struggled significantly on Monday, with notable declines against the JPY and CHF. The USD/CAD pair dipped to a demand zone near 1.3600 but saw firm bidding on the Greenback, keeping it within Monday’s range of 1.3600 to 1.3660. The pair has been consolidating since early May, with lower highs suggesting a fading CAD strength.
A key support level lies at the 200-day Exponential Moving Average (EMA) near 1.3560, while resistance is found at the 50-day EMA near 1.3645. Should the pair move higher, it will encounter resistance near the 2024 peak at 1.3850.
Market Outlook
The market’s focus this week will be on the BoC’s rate decision and the upcoming employment data from both Canada and the US. A rate cut from the BoC could further weaken the CAD, while US employment figures will likely have a significant impact on the USD. Traders should watch for any deviations from expected outcomes, as these could trigger substantial movements in the currency markets.
In summary, the Canadian Dollar faces a challenging environment with underwhelming manufacturing data and potential central bank rate cuts on the horizon. The interplay between CAD and USD, influenced by their respective economic indicators, will be crucial in determining their relative strengths in the near term.
