Canadian Growth Rebounds in November but Dollar Gets Only Limited Boost

GDP growth rebounded in November but is still a way off from the BoC's forecasts, while the Loonie remains a whipping boy of interest rate expectations and NAFTA risks.

The Canadian Dollar rose by a fraction against its international rivals during noon trading Wednesday when the latest instalment of GDP data showed the economy surging back to life in November, after having come to a standstill back in October.

Statistics Canada data showed Canadian GDP rising by 0.4% for the month of November, up from the 0% standstill recorded in October, with 17 out of 20 industrial sectors having recorded gains in activity.

Output from goods producing industries rose by 0.8% in November, after having contracted 0.5% in October, while the services sector rose by 0.3% on the previous month.

“A plus for the broadness of the Canadian expansion which is now contending with a slightly higher interest rate setting and a firmer C$. Still, the strong pace to November growth only keeps us in the 2% or so range for Q4, slightly under the unchanged 2.5% forecast from the BoC,” says Nick Exarhos, an economist at CIBC Capital Markets.

"All told, not much to move markets, although broadbased USD weakness ahead of the Fed this afternoon could see the loonie gain some ground during this morning's trading session."

The USD/CAD rate was quoted 0.52% lower at 1.2272 shortly after the release and the Pound-to-Canadian-Dollar rate was marked 0.44% lower at 1.7384. Both sets of losses, for Sterling and the US Dollar, were only a fraction greater than before the GDP announcement.

Canada’s economy saw a checkered performance in 2017, with economic growth surging ahead in the first half of the year only to lose steam in the final two quarters. It actually posted a surprise contraction during August of last year while, since June, growth has ground to a halt in three separate occasions.

Nonetheless, more broadly speaking, growth has picked up enough to prompt the Bank of Canada to predict that it will reach its inflation target some time in 2018 and for it to begin raising interest rates at an equal pace to that adopted by the Federal Reserve.

The central bank has already raised its main interest rate by 25 basis points, to 1.25%, earlier in January in response to an economy that appears to have taken earlier rate hikes and ongoing uncertainty over the NAFTA trade agreement in its stride.

This was after it stunned markets when it raised the Canadian cash rate at each of two consecutive meetings between July and September 2017.

Pricing in interest rate derivatives markets, which enable investors to hedge against anticipated changes in interest rates, now put the Canadian cash rate at 1.50% by the end of May.

This suggests traders think another interest rate rise is likely before then, which means economic data will matter greatly for the Loonie over the coming months. That same market also prices another interest rate hike before the end of October.

“The technical backdrop continues to suggest good work in carving out a base, with 1.2280 key support on the downside while a move through 1.2380/00 should put 1.2500 as the next major topside attractor—in line with our HFFV estimate,” says Mazen Issa, a strategist at TD Securities.

While some stratgists are looking to the Wednesday GDP report and rate expectations for insight into where the Loonie could go next, others are now taking their cue from recent progress in the NAFTA negotiations.

“On the one hand the current higher price of oil price appears consistent with USD/CAD trading between 1.2000 and 1.2500. In contrast, short-term yield spreads have recently been moving against the loonie and appear more consistent with a higher USD/CAD trading back between 1.2500 and 1.3000,” says Lee Hardman, a currency analyst at MUFG.

“Overall after taking into account key short-term fundamental drivers and NAFTA risks, we believe that USD/CAD is likely to continue to consolidate in the near-term.”

Monday marked the conclusion of the sixth round of talks designed to renegotiate the North American Free Trade Agreement, which guarantees largely free trade with Canada's southern neighbour.

“The latest NAFTA developments appear to have dampened downside risks for the Canadian dollar in the near-term,” observes MUFG’s Hardman.

“However, the slow rate of progress remains a concern. It has prompted negotiators and industry officials to claims privately in recent days that the negotiations could drag on well into 2018 and possibly past the July elections in Mexico that had previously been set as the deadline.”

President Donald Trump once described NAFTA as the worst trade deal in history. He campaigned for the Presidency on a pledge to renegotiate it, or to withdraw from it altogether.

Readers can learn more about the issues at play in the NAFTA talks here; Canadian Dollar Unprepared For NAFTA "Tape Bombs" - Key Issues to Watch.

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