USD/CAD: Edges Up As Canadian Trade Balance Disappoints

 | Jun 05, 2013 03:21AM ET

The Canadian dollar began the new week with strong gains against the US currency, but has given up much of those gains in the Tuesday session. USD/CAD punched across the 1.03 level in the European session, and is trading in the low-1.03 range. The loonie lost ground after a weak Canadian Trade Balance, in contrast to the US Trade Balance release, which beat the estimate.

The markets had a chance to analyze Trade Balance numbers from both Canada and the US on Tuesday. In Canada, the key indicator dropped back into negative territory, posting a deficit of $0.6 billion, higher than the estimate of -$0.4 billion. Last month, Trade Balance came in at $0.0 billion, but the indicator retracted and posted yet another deficit. Meanwhile, the news was better south of the border, as US Trade Balance beat the estimate, although the deficit widened from $-38.8 billion to $-40.3 billion. The estimate stood at $41.1 billion.

In the US, we continue to see weak numbers from key releases. Last week, unemployment, GDP and housing numbers missed their estimates, and this week started in much the same fashion, as ISM Manufacturing PMI dropped below the 50-point level. The index posted a reading of 49.0 points, missing the estimate of 50.6 points. This marked the first time in 2013 that the PMI has pointed to contraction in the manufacturing sector.

Quantitative easing has become a hot topic, as the markets ponder whether the US Federal Reserve will scale back the current round of QE. Fed policymakers, including Fed Chair Bernanke, have hinted that QE could be wound up in the next few months. However, with the US continuing to alternate between good and bad economic releases, the Fed is unlikely to act before it is convinced that the US economy is improving. Much of the volatility we are seeing from the major currency pairs can be attributed to market uncertainty about what action the Fed will take. Further hints from the Fed about scaling back QE will likely affect the currency markets.