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USD Tumbles as ISM Underwhelms; BoC Rate Decision on Tap

Published September 7, 2016
  • All bets look to be off for a Fed hike in September and according to the data there is now less than a 50% chance of a hike in December (Chart 2)
  • As a result, the USD has taken it on the chin and the Loonie has been a prime benefactor with USDCAD falling into the low 1.2800's yesterday from a high of 1.3115 on Friday
  • The drop in USD was precipitated by yesterday’s underwhelming report on economic activity in the US services sector 
  • The Institute of Supply Management (ISM) reported that its index of non-manufacturing activity fell to 51.4 during August, its lowest level since February 2010
  • The index was sitting comfortably at 55.5 in July and was expected to come in at 55 for August so this large downside miss is concerning
  • When coupled with last Friday's payrolls miss and a manufacturing ISM Index below 50 (which indicates contraction), it is easy to see why the market is convinced the Fed will be unable to raise rates in September
  • For CAD traders, the week is just getting started with today's Bank of Canada Interest Rate Decision at 10am ET, the first dish of a two course meal that is complemented by Friday's 0830am Employment Report 
  • While BoC Governor Poloz is expected to deliver a neutral tone this morning, he can't be all that happy with the state of affairs and thus there is a risk of a dovish message being delivered
  • GDP and employment trends have underwhelmed this year, to say the least, and Canada's Trade Deficit ballooned over the last 5 months to a near record before finally making progress in July on a surge in non-energy exports
  • However, with no press conference and no economic projections accompanying this rate decision, we expect Poloz to toe the line rather than deliver any surprises; that being said, he has proven in the past that he is willing to add monetary stimulus without much notice
  • Oil is essentially flat this morning as it trades comfortably just under the $45 handle for WTI crude 
  • The EIA inventory report comes out at 11am ET this morning and is expected to show a small decline in crude stocks of 83k bbl last week

Charts: (1) USDCAD pulls back into the 1.2800's.  (2) Probability Table of a Fed Hike at upcoming meetings. (3) Economic Calendar.