The Canadian Dollar Pares Losses after Economy Grows Faster than Expected in April; Keeps July BoC Meeting "Live"

-CAD pares losses after economy grows faster than expected during April.

-Data comes after strong March number but amid NAFTA uncertainty.

-Should keep July 11 BoC rate hike on the table, boosting the CAD.

© COSPV, Adobe Stock

The Canadian Dollar extended gains over the US Dollar and Japanese Yen Friday while paring losses against other major currencies after official data showed the economy growing faster than was expected during April, seemingly keeping the Bank of Canada on track to raise its interest rate on July 11.

Canada's economy grew by 0.1% during the April month, down from 0.3% in March, when markets had been looking for it to stall, with consensus suggesting GDP growth of 0% during the period.

This puts the economy on track to expand at an annualised pace of between 2% and 2.5% during the second quarter overall, according to some estimates. March data saw annual growth tracking 1.3% which, although down sharply from earlier levels, was in line with the Bank of Canada's prediction for the first-quarter.

Statistics Canada and other economists have attributed the slowdown in growth to inclement weather having impacted the retail industry, with a 1.3% fall in retail trade having detracted from otherwise solid numbers for goods producing industries such as manufacturing.

"Remember that comes on the heels of two solid months, and sets up Q2 to be a roughly 2 1/2% quarter, good enough to keep the Bank of Canada on target for our forecast July hike," says Avery Shenfeld, chief economist at Toronto-based CIBC Capital Markets. "We saw the retreat expected in retail due the weather, with the upside surprise coming in a 0.8% gain in manufacturing. This is bearish for fixed income, bullish for the C$ in helping cement expectations for the next rate hike."

Above: USD/CAD rate shown at hourly intervals.

The USD/CAD rate was quoted 0.29% lower at 1.3216 after extending an earlier 0.06% loss following the release, while the Pound-to-Canadian-Dollar rate was 0.35% higher at 1.7391 after paring back an earlier 0.5% gain.

Above: Pound-to-Canadian-Dollar rate shown at hourly intervals.

Currency markets care about the GDP data because economic growth has a direct bearing on inflation and it is changes in consumer price pressures that central banks are attempting to manipulate when they tinker with interest rates, which are themselves the raison d'être for most swings in exchange rates.

Changes in interest rates, or hints of them being in the cards, impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

"We think there are enough distortions (and potential caveats) in the data to keep the July rate hike on the table," says McCormick. North American head of FX strategy at TD Securities, in a note ahead of the release.

Canada's "Loonie" was quoted lower against all developed world currencies Friday barring the US Dollar, Japanese Yen and US Dollar although it trimmed losses against most in the wake of the April GDP report.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

Bank of Canada in Focus

Friday's data comes less than two weeks away from the July Bank of Canada meeting in which markets are betting the Bank will decide to raise its interest rate for the fourth time in the last 12 months, taking the cash rate up to 1.5%. 

"CAD strengthened notably yesterday in response to a speech on Wednesday by Governor Poloz that keeps alive the prospect of a rate hike on 11th July," says Derek Halpenny, European head of global markets research at MUFG. "This is somewhat surprising given the data has been more mixed of late and trade uncertainty if anything has escalated."

Governor Stephen Poloz told reporters Wednesday the BoC will not conduct monetary policy based on "rumours or speculation", suggesting it will not allow itself to be stymied from raising interest rates by speculation in the press and jitters in financial markets over President Donald Trump's trade policies.

The so called "trade war" between the US, China and more recently, the European Union, has been a hot button issue for all financial markets in recent months but particularly for currencies and the Canadian Dollar. So Poloz having dismissed fears about the monetary policy impact of rumours over what tariffs might emerge from the White House next is positive for the Loonie.

But there was also a dovish bent in the speech and subsequent statements that left some strategists with the impression the BoC could yet eschew a rate hike in two week's time. Poloz said the Bank is attempting to model the likely impact trade uncertainty and new mortgage regulations will have on the economy and inflation, which are both highly important for its interest rate decisions.

"The reasons for a rate hike on the part of the Bank of Canada (BoC) in two weeks’ time cannot be ignored," says Antje Praefcke, an analyst at Commerzbank. "inflation and the different measures of core inflation are comfortably at the centre of the BoC’s target range and the inflation trend too does not leave much to be desired. The unemployment rate has reached historic lows and the business survey for Q2, due for publication today, is likely to confirm the image of dynamic economic activity."

Praefcke says there is still a risk the BoC will opt to do nothing in July but that this is less likely than a decision to raise interest rates again. In the case of the latter, the Commerzbank team forecast the Loonie will be able to appreciate, providing it welcome relief from weeks of heavy losses brought about by fears over the outlook for international trade in general, but particularly the North American Free Trade Agreement.

NAFTA Uncertainty, Trade Tensions Linger

President Trump is pursuing restrictive legislation to govern Chinese investments into the United States and has recently ordered that a range of tariffs be levied against imports of more than $250 billion in American imports of Chinese goods.

The move has drawn retaliation and threats of even further reciprocal measures from the Chinese, which all comes on top of earlier White House tariffs on imports of steel and aluminium into the United States from across the globe, including the European Union.

The EU has since responded to those with its own levies on US motorcycles, jeans and whiskey, drawing threats of even more tariffs from the White House, this time targeting the mighty European automotive sector.

All of these hostilities on the international trade front matter for the Loonie because Canada is also in the firing line when it comes to trade relations with its southern neighbour. Officials from both sides of the border have been attempting, without success, to renegotiate the North American Free Trade Agreement for nearly a year now.

"A thick, dark thunder cloud remains on the economic sky though: the NAFTA negotiations and the concerns about an escalating trade conflict. There is quiet on the NAFTA front following the introduction of tariffs on steel and aluminium imports and the tough language between the two heads of government, as Trump is focusing mainly on China, technology and cars now and has since identified all nations trading with the US as enemies," Praefcke adds.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here