Loonie down amid negative data; markets look to Fed for clues about stimulus

TORONTO – The Canadian dollar closed lower Friday amid disappointing economic data from Canada and the U.S.

The currency was down 0.03 of a cent to 98.34 cents US as Statistics Canada says manufacturing sales fell 2.4 per cent in April to $48.2 billion.

It’s the fourth decline in five months and the largest monthly percentage drop since August 2009.

The agency says lower sales in the petroleum and coal product and primary metal industries were largely responsible for the decline.

Other data showed signs of a weakening American manufacturing sector and consumer sentiment.

May industrial production was flat. Economists had expected a 0.3 per cent increase after production fell by 0.5 per cent in April.

And the University of Michigan’s consumer confidence index came in at 82.7, well below expectations that it would remain at a five year high of 84.5.

In the meantime, traders hope next week’s interest rate meeting by the U.S. Federal Reserve will provide some clarity about plans for its bond purchasing program.

“We expect the Fed to use next Wednesday as an opportunity to clear up confusion about the outlook for quantitative easing and interest rates,” said Scotia Capital chief currency strategist Camilla Sutton.

The Fed holds its next regularly scheduled meeting on interest rates next Tuesday and Wednesday and wraps up with a news conference by Bernanke.

Speculation about Fed intentions has weighed on markets since late last month when Fed chairman Ben Bernanke said that the central bank might pull back on its US$85 billion-a-month bond-buying program, known as quantitative easing, if economic data improves, especially hiring.

The QE program has underpinned a strong rally on U.S. markets by keeping interest rates low.

Equity markets have been volatile and U.S. treasury yields have increased on concerns about how quickly the Fed might taper its bond purchases.

But markets rallied and yields declined Thursday following a Wall Street Journal story that suggested Bernanke will likely use next week’s meeting to try to calm market worries that the central bank is in a hurry to moderate its bond purchases.

Markets have also been weighed down by concerns that the Bank of Japan has done all it is prepared to do to stimulate the Japanese economy.

In April, the Bank of Japan announced a massive stimulus in an attempt to get inflation up to two per cent. The euphoria that drove the Nikkei up to five-year highs has been followed by wild fluctuations. The index is now around 20 per cent down from its May 23 peak, leaving the market in bear market territory.

Meanwhile, commodity prices were higher with the July crude contract on the New York Mercantile Exchange ahead $1.16 to US$97.85 a barrel.

July copper was up two cents to US$3.20 a pound while August bullion rose $9.80 to US$1,387.60 an ounce.