Explainer: How Does CAD React To Expansion of Canada’s Economic Activity

Fresh data has indicated expansion of Canadian economic activity at a faster pace in November and a measure of price pressures cooled according to Ivey Purchasing Managers Index (PMI) data, released on Tuesday.

The seasonally adjusted index rose to 51.4 in November from 50.1 in October. The Ivey PMI measures the month-to-month variation in economic activity as indicated by a panel of purchasing managers from across Canada. A reading above 50 indicates an increase in activity.

The gauge of employment dipped to an adjusted 54.3 from 54.6 in October, while the prices index was at 63.5, down from 69.8. The unadjusted PMI edged up to 51.5 from 51.4.

The Canadian dollar weakened to a one-month low against the US dollar on Tuesday as equity markets and oil prices fell, while investors await a possible smaller interest rate hike by Canada’s central bank. The Canadian dollar was trading 0.6% lower at 1.3665 to the USD, or 73.18 US cents, after touching its weakest level since Nov. 4 at 1.3675.

Among G10 currencies, only the Norwegian crown fell more. Norway, like Canada, is a major producer of oil. It looks like a combination of risk-off trading in equities and the sell-off in crude oil are taking its toll on the CAD.

Wall Street’s main indexes slid as investors worried about longer tightening from the Fed despite warnings of a potential recession next year. US crude prices settled 3.5% lower at $74.25 a barrel as concerns about global demand offset the bullish impact of a price cap placed on Russian oil.

Traders could also be betting against the CAD in anticipation of tomorrow’s Bank of Canada meeting, as the path of least resistance is for the BoC to downshift again with a 25-basis point hike. Money markets are betting on a 25-basis-point rate increase when the BoC meets to set policy on Wednesday, with a roughly 25% chance that the central bank would hike by 50 basis points as it did in October.

A slim majority of economists expect the larger move. Canada’s trade surplus widened to C$1.2 billion ($878.2 million) in October as exports and imports both climbed.

The Canadian 10-year yield touched its lowest level since Aug. 16 at 2.767% before recovering slightly to 2.775%, down 4.5 basis points on the day.