Positive job, PMI data strengthens Canadian dollar

On the basis of a decline in the Eurozone current account surplus and an upbeat sales data reported by Statistics Canada June 23, we had forecasted the EUR/CAD pair to decline from a level of 1.4840.

We had also stated our interest to go short in the EUR/CAD pair and simultaneously purchase a put option. As anticipated the pair declined to close at about 1.4740 in a week, thereby resulting in a profit from both trades. We expect the EUR/CAD pair, which is currently trading at 1.4680 levels to decline further due to the facts presented below.

Statistics Canada reported an overwhelmingly positive employment change data on Friday. The economy created 45,300 jobs in June, compared with 54,500 jobs in the previous month, but far better than 11,400 jobs anticipated by analysts.

Correspondingly, the unemployment rate declined to 6.5% in June, from 6.6% in the earlier month. The market was not expecting any change in the unemployment rate.

Wochit Politics

The positive employment data, being a leading indicator of consumer spending, indicates an improvement in the Canadian economy.

Similarly, the Ivey PMI (Purchase Managers Index) reading for June was 61.6, versus 53.8 reported in the previous month, and greater than economists’ expectations of 57.7. The survey of 175 purchase managers indicates an improvement in business conditions, including employment, new orders, production, inventories, and supplier deliveries.

On the other hand, the Italian retail sales declined 0.1% m-o-m in May, versus an anticipated growth of 0.3%. Last month, Italy’s statistics agency Istat reported a downwardly revised 0.4% decline in the retail sales.

According to the data from the US Energy Information Administration, the crude oil inventories decreased 6.3 million barrels in the week ended June 30. That topped analysts’ estimates of a 2.4 million barrel decline. In the previous week, the inventories increased 0.1 million barrels. A decrease in the inventory would stop the price of crude oil from falling further and indirectly strengthen the Canadian dollar.

Thus, positive economic data is expected to keep the Canadian dollar strong, while the Euro dollar could come under an increasing selling pressure due to poor Italian retail sales data. The EUR/CAD pair is moving along a declining regression channel, as shown in the image below. The MACD histogram reading has turned negative. The loss of momentum is also confirmed by the RSI indicator with a reading below 50. Thus, we can expect the EUR/CAD pair to decline to a low of 1.4460 where the next major support exists.

A short position is preferred on the basis of the above analysis. The ideal entry level is 1.4680, with a stop loss order above 1.4820. We wish to cover the short position near 1.4460.

We also wish to pick a put option when the EUR/CAD pair trades near 1.4680. Before investing, we would like to make sure that the broker offers a contract valid for a period of seven trading days.