Forex: USD/CAD awaits September Canadian Building Permits

on Nov 6, 2013

**, Wednesday 6 November:**

Canadian Building Permits for September m/m will be reported at 13.30 UTC today. The market consensus is for a soft rise of 7.8 percent, following the wild 20-plus percent swings in both directions over the prior two months. In August, this leading gauge of future construction activity logged a decline of 21.2 percent, the sharpest drop for the metric since March 2007.

Benjamin Reitzes, senior economist at Bank of Montreal (BMO), expects permits to be “flat to slightly higher [in August], though units will likely continue to trend modestly lower.” Reitzes predicts a weaker-than-anticipated reading for growth of just 5.0 percent.
On a more positive note, the Ivey’s Canadian PMI for October is also due out today, at 15.00 UTC, with forecasts for a sizable improvement to 54.7 from September’s 51.9.

The charts below illustrate the lockstep movement of the EUR/GBP and USD/CAD, seemingly because of the similar risk profiles of the constituent pairs. The US dollar and the euro benefit against their continental peers due to their greater use as reserve currencies as compared with the loonie and sterling. So far this year, both the EUR/GBP and the USD/CAD are up, though the European quote has gone from leader to laggard in just a couple of months.

The divergence over the last three months (right chart above) between the two pairs may be because of the strong UK economic data and rising rate-differentials in favour of the greenback. However, the deviation from the post-crisis normal could also provide a potential arbitrage opportunity in narrowing the abnormal gap.

The USD/CAD has lagged the EUR/GBP since the start of the year and it could eventually turn lower, following the euro pairing. The current sentiment on the EUR/GBP is bearishly skewed because the market believes that the European Central Bank will strike a more dovish tone this week, as compared to the BoE. But if the ECB fails to live up to expectations and doesn’t signal potential easing measures, the EUR/GBP could rise.
Right now, the USD/CAD is trading around 1.0447, down 0.07 percent intraday.
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