Today’s March GDP data from Canada came in broadly as expected, with the economy expanding 1.1% month-on-month vs expectations of 1% as lockdown conditions continued to ease, while the Q1 annualised data undershot market expectations by 1.2% after printing at 5.6%.
For FX markets, the hard GDP data comes with an extreme lag, making it unrepresentative of current conditions.
Since March, most major provinces have tightened lockdown conditions for between 4-8 weeks which will weigh on growth in Q2 just as the economy was in spitting distance of pre-pandemic levels of output. With such a lag, the data would only move the needle for the loonie if the economy entered the more challenging second quarter with more or less momentum than expected. However, such a minor overshoot in the monthly GDP data has done little to excite traders as it falls well within the margin of error. Instead, those trading the Canadian dollar will be keeping a closer eye on the signal OPEC+ send oil markets later today after speculation that the price of Canada’s main export is only set to increase as the global economy reopens along with Friday’s more timely labour market data.
The details inside today’s GDP report highlight how elastic Canada’s services sector is to lockdown restrictions, suggesting little scarring once the economy begins to reopen again in the coming weeks, while other sub-sectors remain resilient to the tightening conditions.
The recovery in the first quarter was broad based, with 15 out of 20 sectors recording gains, however, the subsequent tightening of lockdown conditions suggests most of the economic momentum posted in March was reversed in April. Statistics Canada estimates growth to have contracted by 0.8% in April, with retail and accommodation and food services reflecting the change in public health measures.
For the Bank of Canada, today’s release undershot their expectations of the Q1 rebound, with annualised Q1 growth printing at 5.6% compared with their forecast of 7%.
To add to their woes, Q4’s growth was marginally revised down from 9.6% to 9.3%, while Q2 growth is expected to undershoot their forecast of 3% given lockdown conditions remained tight in April and May. It is likely that on today’s data alone, the BoC could cast a more cautious tone in next week’s policy statement unless further progress is made in other data points before June 9th. For financial markets, other developments such as rising commodity prices, vaccine optimism in Canada, robust growth in the US, and rising house prices in Canada means the growth data thus far is of little concern. Instead, developments in the outlook for WTI and Friday’s more timely labour market data will prove more decisive for the loonie as it sits near 6-year highs.
Canadian dollar sits close to six-year highs despite GDP data undershooting both the market and BoC expectations
Simon spoke with Fergal Smith at Reuters on Canada’s GDP data release. Read the full coverage here.
Author: Simon Harvey, FX Market Analyst