Dollar Remains Firm Despite Weak ISM and Mixed Personal Income/Spending Data

The U.S. dollar is trading higher against every major currency except for the Aussie, because the market expects an interest rate hike from Australia this evening. It will be an exceptionally busy week in the forex markets with 4 central bank monetary policy announcements and the U.S. non-farm payrolls report due for release. Volatility has already hit the British pound which is down more than 2 percent this morning on fears of further Quantitative Easing from the BoE and news that Britain's Prudential plans to buy AIG's Asia operations for $35.5 billion in cash and stock..

This morning's U.S. economic data slightly weaker. Personal income rose by 0.1 percent in January while personal spending rose by 0.5 percent. Although the pickup in spending is encouraging, it is never a good thing to see Americans spend more than they make. With Friday's non-farm payrolls number expected to reflect accelerated job losses in February, the outlook for spending and incomes remain bleak. Price pressures are muted with the PCE deflator flat in January. Core prices remained unchanged. The national ISM manufacturing index fell from 58.4 to 56.5 which was a bit surprising considering that the regional indices all improved. The drop was largely tied to the sharp decline in new orders and production. However with a good number of the underlying components rising in Feb, the negative impact on the dollar should be limited. The employment component rose materially which indicates that manufacturers are continuing to hire and the backlog of new orders has increased.

Bank of Canada Not Likely to be Swayed by Latest Data

Meanwhile with a central bank meeting on the calendar tomorrow, it will be a big day in Canada. The Canadian dollar has strengthened over the past 24 hours and could hold onto its gains thanks to hotter than expected GDP numbers. After a deep recession, growth in the fourth quarter was the fastest since 2000. Believe it or not, on an annualized basis, Q4 GDP growth was 5.00 percent. In December specifically, Canada grew by 0.6 percent, which is not particularly impressive but still the fastest since December 2006. Inflationary pressures are also picking up according to the rise in industrial product and raw material prices.

However we do not expect the Bank of Canada to be swayed by the latest improvement in economic data. No one expects the BoC to raise interest rates and they will most likely reiterate that rates will remain unchanged until June at the earliest. Last month, BoC Governor Carney predicted that weaker trade would hinder growth this year. At their last meeting, they said a strong currency and weak U.S. demand will keep Quantitative Easing intact. However it is important to recognize that barring any negative shocks to the Canadian economy, the central bank will be inching closer to an exit. There is still upside potential in the Canadian dollar particularly if the BoC's comments become a tad more optimistic.