A drop in input prices wouldn't offset the weak domestic and foreign demand that has striken Canadian manufacturers, according to the August reading for business activity. The Ivey Purchasing Managers Index dropped faster than expected for last month's reading.

In fact, the decline marked the biggest month-over-month drop in activity since the contraction between November and December of 2005. Looking at the breakdown of the report, the review of the vital Canadian sector wasn't as disappointing as the headline number suggests. Employment rebounded from its first contraction (sub-50 reading) since December of 2002. Prices slipped to its lowest level since March, reflecting the easing of key input costs like crude and heating oil. Even inventories fell back, suggesting capacity to increase production in order to fill warehouses. However, the dominate component of this report remains the supplier deliveries figure that has contracted for a fifteenth consecutive month through August. With this point of the production chain faltering, it reflects little ultimate demand for production. This report of a still weakening business sector weighed on the Canadian dollar. After its release, USDCAD reversed its losses after the better than expected Canadian employment data and led the pair to a 70 point rally that had yet to meet its top. This move may test 1.07 to see whether the week ends with yet another lower swing high to build the bears' case. - John Kicklighter, Currency Strategist for DailyFX.com