According to the National Bureau of Statistics Canada last Tuesday, shipments in Canada’s manufacturing sector unexpectedly declined in July amid falling sales of metal products and automobiles. Sales in the manufacturing sector fell in July by 1.3%, amounting to 57.15 billion Canadian dollars (43.12 billion US dollars).
At the same time, the capacity utilization in July fell to 77.3%, reaching the lowest level in more than two years. Economists predict the restrained prospects of the manufacturing sector in Canada amid a slowdown in economic growth in the world and in the USA, which are Canada's closest trading partner.
At the beginning of this month, the central bank of Canada left the key interest rate unchanged at 1.75%, but did not give a clear signal about an imminent reduction in interest rates.
The deputy head of the Bank of Canada, Chambrey, said the next day that "the trade war is the main cause of concern and the main risk for forecasts", although, according to him, "the Canadian economy has the necessary degree of resistance to possible negative events", and "the interest rate on the current level of 1.75% continues to support the economy”.
"The Canadian economy is growing at a rate close to potential, while inflation is in line with targets", the Bank of Canada said. But "the escalation of trade conflicts and the associated uncertainty negatively affect the Canadian and global economies".
The rhetoric of the Bank of Canada in a companion statement was less lenient than expected.
Nevertheless, as many economists believe, the Bank of Canada will sooner or later have to soften its monetary policy. It is more likely to happen in December, and not in October, when the next meeting of the bank devoted to monetary policy issues will take place.
Growing concerns about the state of the global economy have forced a number of central banks around the world to lower interest rates or signal an increased likelihood of monetary easing. The ECB in September lowered its key interest rate on deposits to -0.5% and resumed the QE program.
The US Federal Reserve in July lowered its short-term rates by a quarter percentage point, and is expected to once again lower the rate by 0.25% to 2.0%. The decision on the Fed rate will be published today at 18:00 (GMT).
Fed Chairman Jerome Powell in July called the decision a “mid-cycle correction” and refuted investors ’hopes of starting a cycle of aggressive rate cuts.
According to Powell, Fed officials do not believe that they have begun a longer cycle of lowering rates and repeated earlier this month that the central bank does not predict a recession.
The growth rate of employment has slowed, but remains strong enough so that the unemployment rate does not increase, and data on prices and salaries stabilize.
The level of consumer confidence is high, and the income of Americans is growing. American consumers and investors are optimistic about the US economy and the US stock market.
The US Department of Labor data released last Thursday indicated a more significant increase in core inflation than economists had expected. The basic consumer price index rose by 0.3% in August compared with the previous month and by 2.4% compared to the same period in 2018.
The main criteria in determining its monetary policy for the Fed are the state of the labor market, GDP growth and inflation in the United States.
Acceleration of inflation may prompt the Fed to inform on Wednesday about the limited space for lowering rates in the future.
According to CME Group, investors estimate the likelihood of another rate cut this year (after lowering it on Wednesday) at 58%. On August 20, this probability was 93%.
If the leaders of the central bank nevertheless signal the next rate cut this year, the US stock market will receive a powerful incentive for further growth, and the dollar may drop sharply.
Otherwise (if the Fed reduces the rate by 0.25%, but does not give a signal about a further reduction in the rate), the dollar, after a short-term reduction, may go up.
In the context of international trade conflicts and amid the easing of monetary policy by other major world central banks, the dollar retains the status of a protective asset.
Recall that the decision on the rate will be published today at 18:00, and the Fed press conference will begin at 18:30 (GMT).
Regarding the Canadian dollar, it is worth paying attention to the publication at 12:30 (GMT) of consumer price indices (CPI). These indicators reflect the dynamics of retail prices of the corresponding basket of goods and services. The target inflation rate for the Bank of Canada is in the range of 1% -3%. The increase in CPI is a harbinger of a rate increase and a positive factor for CAD. According to the forecast, it is expected that the consumer price index will come out with a value of + 2.0%, which probably will not provide significant support for CAD after the index also increased in July by 2.0% (in annual terms) and also by +2 , 0% rose the base consumer price index.
If the data for August is worse than the forecast and previous values, then this will negatively affect CAD. Conversely, the data better than expected and above the previous values will strengthen the Canadian dollar.
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