CAD: Setting Up for Real GDP – TDS
Research Team at TDS, suggests that despite cooling over the course of the quarter, the Canadian economy is forecast to have grown by an annualized rate of 2.7% in Q1.
“This is in line with the market expectation and the Bank of Canada’s forecast presented in the April MPR. As such—and barring a significant surprise in excess of +/- 0.5%—this release will have a limited impact on the market.
The composition of Q1 growth will reflect the familiar theme of continued momentum in the household sector (both spending and residential investment) counterbalanced by ongoing weakness in business investment. The swing factor in this report will be a rebound in exports (forecast to rise by an annualized 8.4%) which benefited from a strong Q4 handoff followed by a very solid January increase. Subsequent weakness on this front is emblematic of conditions in the wider economy reflected in a forecasted 0.1% m/m (unannualized) drop in March industry-level real GDP. In addition to the weak handoff, Q2 will be severely impacted by the disruptions caused by the wildfires in Northern Alberta before a normalization of activity supports growth over the second half of the year.
The FX markets are consolidating early this week ahead of key US data releases later in the week. We think these external drivers will matter more for USD/CAD, in particular against our forecasts for stable GDP release. Indeed, while the BoC has acknowledged the recent pickup in economic activity, it has not led a shift of when they expect the output gap to close. This matters more for USD/CAD than one GDP print, so we prefer buying USD/CAD on dips. That said, the market has quickly reversed it pricing for the Fed, leading to a sizeable rally in the USD.
We expect the market to trim some USD exposure ahead of some of the key U S data releases this week so decent Canadian data could offer some mild intra-day support for the single currency. We see strong intraday support between 1.2980 and 1.3030 so would look to add long USD/CAD exposure there.”