News & analysis

The loonie steadied near a two-week high against the dollar ahead of the Bank of Canada Q2 business outlook survey and was little changed after the survey was released.

The quarterly business outlook survey helps guide monetary policy decisions as it provides a good anecdotal account of conditions in the real economy. Since March, the BoC has cut rates to a record low of 0.25% and started conducting quantitative easing; both tools have been implemented throughout the crisis by most major central banks.

  • Business sentiment in Canada fell to its lowest since Q1 2009 as lockdown measures were implemented in the second quarter. The business outlook survey indicator for future sales dropped from a strong positive level of 22.0 in Q1 to -35 in Q2, while sales from the past 12 months moved to -7.0 in Q2 after a strong year. The outlook showed that the Western Canadian energy sector. continued weakness in housing-related activity in some regions and tangible impacts from global trade tensions are the key drivers of worsening expectations about demand.
  • Businesses in most regions and sectors intend to cut their investment spending, with the balance of opinion on investment intentions in machinery and equipment falling to a near-record low.
  • The services and energy sector do not expect their employment levels to return to pre-virus levels within a year. Only a quarter of the surveyed firms plan to refill some positions after the recent layoffs, while one-third say they have used a federal wage subsidy to reduce or avoid further layoffs. The share of businesses reporting major worker shortages declined significantly, citing increased labour market slack. This falls in line with the 8m workers currently on government support programmes. The probability of losing a job rose to 18%, while the probability of finding a new job within 3 months fell to 40.64%. Both are indicative of stagnation in labour market churn, leading to subdued wage pressure as slack in the labour market returns.
  • Downward pressure on prices and inflation is concentrated among the services sector, as it is often linked to lower energy prices and weaker demand conditions which have been the case during the pandemic. Inflation expectations have declined significantly, with those expecting inflation at 1% over the next year rising from 4.0% in Q1 to 25% in Q2. Firms expect the effects of the depreciation to flow through to their costs of imports. Still, the majority of companies expect inflation to be within the Central Bank’s target range of 1%-3%, although inflation expectations broadly declined to near-record lows.
  • Concerns around unemployment rose to the highest level ever recorded in the BoC’s survey.
  • The poll was taken between May 12th and June 5th. The survey showed that despite lockdown measures easing, many companies are struggling with weak demand.

The negative sentiment caused by the lockdown measures and the crash in oil prices weighed on the Business Outlook Survey results, but much of this seemed to be priced in by markets already.

The Q2 reading should be viewed in the context of when the data was collected; the survey was conducted weeks after a national lockdown was imposed and oil prices turned negative while Western Canada Select also hit record lows.

The week is far from over for the loonie with Finance Minister Bill Morneau due to present an economic and fiscal snapshot on Wednesday amid concerns about the sustainability of Canada’s debt after Fitch downgraded the nation’s rating just over a week ago, while Canada’s employment report for June is due on Friday.

 

 USDCAD 1 month

 

Author: Ima Sammani, Junior FX Market Analyst

 

 

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