CAD: Setting up for manufacturing sales (May) - TDS

Research Team at TDS, suggests that the impact of the wildfires in Northern Alberta will introduce a significant amount of uncertainty into the forecast for Canada’s manufacturing sales.

Key Quotes

“On an outright basis, the petroleum and coal category represents around 10% of manufacturing output. And while the volume of output was severely impacted by the wildfires, a sharp increase in prices will lift the nominal value of the limited production that took place.

More broadly, higher industrial prices will also provide support for headline sales above and beyond what is expected to be a softer month for volumes of transportation products. Weighing these crosscurrents leaves us with a forecasted decline in headline sales of 0.2% m/m in the month of May. But where we have more confidence is in manufacturing volumes that will come in well below than the nominal print and contribute to what is expected to be a very weak reading on industry-level real GDP.

Foreign Exchange: The May manufacturing release should not have a material impact on CAD. This reflects that external drivers continue to dominate the price action in the single currency. The focus remains on risk appetite, oil prices and rate spreads between the US and Canada. The latter has slightly shifted in CAD’s favor since the BoC meeting on Wednesday, reflecting their glass is half full approach.

We think the BoC is still too optimistic about the rotation from energy to non-energy sector and this report is likely to suggest than the rotation remains slow. The BoC’s optimistic outlook for H2 will place greater emphasis on the data that should increase CAD focuses to the incoming. Further evidence that the economy is losing momentum will offer further support for USD/ CAD, especially if better US data shifts the odds of a Fed hike this year.”