CAD: Setting Up for Real GDP (January) – TDS
Research Team at TDS, suggests that strong activity-level data will lend support to what should be a stellar month for the Canadian economy.
“Real industry-level GDP is forecast to grow at an above-consensus 0.4% on a monthly basis, which would mark the fastest pace since June 2015. Manufacturing volumes rose by 2.4% in January, driven by a strong (+9.6% m/m) auto sector as low gasoline prices continue to drive demand for Canadian-made light trucks and SUVs. Railcar shipments were also higher in the month, indicating a pickup in commodity-related industries. Looking to the services sector, the number of hours worked was up sharply in January while retail volumes rose by 2.2% m/m. Utilities could provide a minor offset due to the unseasonably warm weather throughout the month, but it will not be enough to significantly dampen the overwhelmingly positive tone of the report.
After a solid handoff from Q4, our forecast for industry-level GDP corresponds to an annualized Q1 growth rate of nearly 3.0%, which reflects a sizeable upside risk to the Bank of Canada's conservative 1.0% estimate in the January MPR. This, along with the forthcoming fiscal stimulus unveiled in the 2016-17 budget, will should keep the Bank firmly on the sidelines in the coming months.
The Canadian dollar has had a strong month, rallying a tad over 4% against the greenback. This added further support to the rally over Q1, totaling nearly 6.5%. This reflects the stabilization in oil prices and stronger Canadian data relative to the US. Indeed, Canadian data surprises have widely outperformed the US, leading to a compression in the 2y interest rate differential.
Given this backdrop, we think CAD will remain sensitive to growth and inflation releases. TD’s above consensus call would translate into a near one standard deviation upside surprise relative to consensus. This level of surprise in GDP over the past year has seen CAD rally about 0.66% on the day. This is nearly double the returns of for a one standard deviation miss. In turn, we think a solid January release could provide some tailwinds to CAD following the release, but we also see strong resistance near 1.2940. This level is likely to offer USD/CAD strong support ahead of Friday's NFP report.”
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