Canada's PMI Surprises Lower, Contraction Continues

The Ivey Purchasing Managers Index fell from 45.2 to 43.2; economists surveyed by Bloomberg had expected the measure to rise to 47.0. The move lower follows a sharp rise in the index which bottomed at 36.1 in January. The measure of expansion has now declined for the past five months as the economy suffers through its first recession since the early 1990s. Exposure from abroad remains a top concern as contraction in the US, Canada’s largest trading partner, weighs heavily on the nation. Slowdown in credit markets and demand destruction in commodities have also had a dire effect on the domestic economy as housing starts continue to tumble and unemployment rose to 7.7% in February from 7.2% in the previous month. Canada’s recovery will ultimately be tied to that of its southern neighbor, but it is clear that the downturn will not be nearly as severe if the US economy grows in the latter half of the year and into 2010. Early signs in the survey may also show hint at possible recovery in the months ahead. The Inventory measure of the Ivey report rose from 40.2 to 50.8, the first expansion since October. As demand fell, manufacturers have cut back on production and trimmed payrolls. The first rise in six months signals that months of steep job cuts meant to reduce inventories and capacity utilization may be ending.

The Canadian dollar is weaker this morning, with the USDCAD moving over 100 pips higher in the past few hours to 1.2390. The US Dollar fell significantly in the previous week as risk appetite increased and demand for the safe-haven currency fell.