USDCAD Breaks Higher Ahead of BOC, Despite Improving Mfg.

USDCAD turned lower in August, losing 5 cents, but has made a bullish reversal this week as markets prepare for the third rate cut by the BOC. Today’s Manufacturing PMI report showed that activity improved in August, however, that’s not helping the Canadian Dollar as risk sentiment remains negative, with stock markets in retreat again, which is pushing USD/CAD toward 1.36.

USD/CAD Chart Daily – The 50 SMA Has Been Broken

USD/CAD turned higher last week, and the 20 SMA (gray) turned into support on the H4 chart, however the 50 SMA (yellow) turned into resistance at the top. However, today the price broke above the 50 SMA, and opens the door for further gains, with expectations for another rate cut by the Bank of Canada tomorrow. The Manufacturing PMI report which was released a while ago  indicated that activity is heading toward expansion, although not yet, however it didn’t stop the upside momentum.

Manufacturing PMI and Economic Overview

• August Manufacturing PMI: 49.5 points, up from 47.8 points in July. This marks an improvement but still signals contraction, as it remains below the 50.0 threshold.
• S&P Global Manufacturing PMI for Canada: Also registered 49.5 in August, continuing below the no-change mark for the 16th consecutive month.
• Deterioration Continues: Operating conditions in Canada’s manufacturing sector are still deteriorating, but the decline is the softest since March, with slower reductions in both output and new orders.

Challenges Faced by the Manufacturing Sector

• Shipping Delays: Significant shipping delays, especially in ocean freight, have led to deteriorating vendor performance.
• Rising Costs: Input cost inflation has accelerated, reaching its highest point since April 2023. Output charges have also increased at the fastest rate in nine months.
• Supply Chain Issues: Delays in sea freight and low inventories at suppliers have caused average lead times to deteriorate to an 18-month high. Firms have modestly increased input stocks to manage these risks.

Employment and Sentiment

• Job Shedding: After a slight increase in July, job cuts returned in August due to lower production needs and cautious client behavior.
• Market Confidence: While firms remain positive about the future, confidence levels are below the long-term trend, weighed down by concerns about the impact of high prices and elevated interest rates on demand.
• New Export Orders: These have continued to decline, marking the 12th consecutive month of decrease, reflecting ongoing challenges in the global market.

Price Pressures

• Inflation in Input Prices: Accelerating due to increased costs of raw materials, unfavorable exchange rate movements, and high shipping costs.
• Rising Output Charges: Manufacturers have raised their prices to the highest level since last November to offset the increased input costs, indicating ongoing inflationary pressures within the sector.

Key Takeaways

• The Canadian manufacturing sector is facing a challenging environment, with continued contraction, albeit at a slower rate.
• Rising costs, supply chain delays, and weak export demand are key issues.
• Despite these challenges, firms are cautiously optimistic, suggesting potential stabilization in the near term if external conditions improve.

Commenting on the latest poll results, Paul Smith, Economics Director at S&P Global Market Intelligence, said:

“While Canada’s manufacturing sector still falls short of expectations, the smaller reductions in both output and new orders suggest that performance was marginally better in July than in August. This offers a glimmer of hope that the sector may be stabilizing after a lengthy period of decline. However, the decrease in employment and reduced purchasing activities reflect persistent uncertainty among businesses. This sentiment is also evident in their outlook, with confidence remaining below average. Concerns over rising prices persist, as the most recent inflation figures are worrisome. Cost pressures have climbed to their highest level in roughly 18 months, and inflation in output charges has seen a significant increase.

USD/CAD Live Chart