The Loonie Weakens Despite Gross Domestic Product Advanced in July

THE TAKEAWAY: Canadian Gross Domestic Product advanced in line with expectation > Manufacturing, Wholesales and Transportation services gained>The Australian Dollar weakens.

The Gross Domestic Product report released by Statistics Canada today showed that the economic activity in Canada expanded 0.3 percent in July following a 0.2 percent advance in June. The reading is in line with the median forecast from Bloomberg survey. From a year earlier, Canadian gross domestic product edged up 2.3 percent in July while June’s figure was revised upward to 2.1 percent from 2.0 percent.

Canadian Gross Domestic Product, Monthly Change: January 2010 to Present

Prepared by Trang Nguyen

Economic growth in Canada was on track for the second month, led by gains in manufacturing, wholesale trade, utilities and transportation services. Despite of declines in raw material and producers prices that signaled weakness, manufacturing output rebounded 1.4 percent after falling for three consecutive months, with gains recorded on both durable and non-durable goods. Meanwhile, transportation activity and wholesale trade surged 1.8 percent and 1.5 percent, respectively, mostly contributing to a rally in service-producing. On the other hand, outputs in agriculture, mining, retail trade, construction, finance and insurance sector decreased that trimmed gains in Canadian total products in July.

CAD/JPY 1-minute Chart: September 30, 2011

Charts created using Strategy Trader– Prepared by Trang Nguyen

Since Canada’s economy is one of few economies in the world that has been less affected by a prolonged sovereign debt crisis in Europe, investors have optimistic views on the country’s growth prospect. Large capital inflows to Canada recently might reinforces speculation on the loonies’ appreciation versus other trading partners. As can be seen from the CADJPY chart above, the Canadian dollar strengthened against the yen before the release. The currency pair rose from 73.50 to 73.75 as market participants had increase their loonie holdings in the hope that Canada’s economic activity in July expanded more than projections. Therefore, the currency pair’s strong up-trend was completely reversed as the reading failed to beat economists’ forecast. The “bearish engulfing” pattern following the Statistics Canada ‘s report signified that buyers are losing control. The loonie lose its footing and rapidly dropped to 73.523 after ten minutes. At the time this report was written, the CADJPY has continued its downward trend, traded at 73.39 yen. The Relative Strength Indicator was touching a 30-level, indicating that foreign exchange trading crowd was massively selling the loonie in favor of the yen. Given the downside risk to global economy with soaring fears of sovereign debt default in the Europe and recession in the United State, the largest trading partner, Canada’s economy is hard to avoid a slowdown in the intermediate future.

Written by Trang Nguyen, DailyFX Research Team