The only data out today is the U.S. non-manufacturing ISM index, which fell to 53.9 in February from 54.5, beating market expectations of a drop to 53.

RBC Financial says that the index continues to point to the expansion of the service sector and is in line with its expectations that U.S. real GDP will expand by 2.5% on a annualized quarter-over-quarter basis in the first three months of this year.

“Any downgrading of geopolitical tensions should see growth pick up in the remaining three quarters of 2003,” it says.”The policy environment and business fundamentals are more supportive today than they were at the time of the last Gulf war, providing a measure of comfort that the post-resolution bounce in economic activity will be sustained.”

No data in Canada, although RBC observes that the rate hike yesterday strengthened demand for Canadian dollars. “Widening short-term interest rates differentials relative to the U.S. and the likelihood that they will keep widening is music to the ears of those holding on to Canadian dollars. Already at the end of last year there was evidence that international investors were taking advantage of higher rates in Canada by plowing funds into Canadian money market instruments. This should turn into a trend this year as macroeconomic conditions in Canada are expected to lead to more rate hikes,” it says.

“The Fed, in contrast, is facing a more sluggish economy and a lack of any upward inflationary pressures. Rate hikes south of the border are not expected until very late into the year with a risk that the Fed may remain on hold for the entire year,” RBC says. “The bottom line will be yet wider Canada-U.S. rate spreads and an extension of the strong bid behind the Canadian dollar. Further Canadian dollar gains relative to major currencies are expected as the year progresses. With the Canadian dollar already sitting at 68 cents U.S., an upward revision to our year-end forecast of 68.5 cents will be a topic of discussion in the weeks to come.”