Canadian Dollar: Will Growth Figures Revive the Currency’s Clout?

Referring to the central bank’s forecasts this past week, it seems the world’s eighth largest economy is on track for an impressive recovery. A 2 percent annualized pace of growth in the third quarter and 3.3 percent in the fourth quarter offers a considerable contrast to the nation’s performance through the first half of the year. As domestic conditions further improve and the US enjoys its own recovery, the economy is seen further expanding 3 percent through 2010 and 3.3 percent in 2011. Though, as the saying goes, ‘the journey of a thousand miles begins with a single step.’ In the coming week, Statistics Canada will report its GDP report for the month of August. The economy reported grew for the first time in 11 months through June; but the first measure of the third quarter showed the recovery stalled before it could even begin. A modest 0.1 percent increase is projected for the August reading; but there were hurdles to overcome over this period. The US ‘Cash-for-Clunkers’ program expired during this month and the impact on the Canadian manufacturing sector will not be insignificant. Adding to this weight, the economy ran a record trade deficit and the unemployment rate hit an 11 year high during the same period.

Scanning the rest of the Canadian economic docket for the coming week, there are no other major market moving economic indicators to be concerned with; but that doesn’t mean fundamental activity will start and end with the Friday release. It is important to recall two more highlights from this past week’s policy announcements. The first is the reiteration by the Bank of Canada that the benchmark lending rate would be maintained at its current level “until the end of the second quarter of 2010”on the condition that inflation does not force their hand. Currently, the annualized pace of headline inflation is at a 56-year low and core pressures are tame. Nonetheless, overnight index swaps are pricing in 85.4 basis points of tightening over the coming 12 months. This is generally on the same level as the dollar, euro and pound; and yet the Canadian dollar is still showing general strength against these counterparts.

The more explosive; but less intimidating remarks from the past week center on the Canadian dollar itself. Repeating concerns from the past; the central bank said the high level of the national currency could offset other, positive growth factors going forward. This is a relatively weak effort to talk the currency down – one that speculators have become acclimated to. So, to up the ante, BoC Governor Mark Carney said in commentary following the release of the Monetary Policy report that “intervention is always a possibility.” While the there are few instances of manipulation by the central bank in the past, this shows a level of exasperation that could lead to action later down the line. - JK


Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at jkicklighter@dailyfx.com