Loonie Doesn’t Rally Around Strong Growth

In the USDCAD pair, the much of the Asian and European liquid hours were defined by the range that was formed yesterday between 1.1125 and 1.1085.  However, around 8:00 GMT, a break above the range high triggered a quick 105-point rally that stopped out around 1.1195. 

Though the Canadian economic calendar was loaded with a July gross domestic product report from Statistics Canada, its importance was already tempered by padded expectations and the realization that it was an ‘old’ report.  While the GDP indicator is the most conclusive amongst the economic growth reads, since it is produced by the government, market participants had already measured the health of the various sectors of Canada.  Another issue with the market moving potential of the this read was that the strong performance of certain sectors, like raw material exporters and wholesalers, had already led many to believe a rise was almost certain.  In fact, the month’s report came in line with its 0.2 percent consensus.  Accelerating to its fastest pace in four months, nationwide growth was propped up by strength in mining, finance and wholesales.  Mining, which included oil and gas extraction, jumped 1.8 percent for the month as crude prices reached record highs.  Amongst wholesalers, the best performer through the year, a 1.0 percent increase in activity was the result of strong domestic spending up until that point.  Looking at future growth trends, the same strength seen in July may not be in store.  Though Canadian continue to spend, the backbone to the economy – namely exports – will likely take a big hit as prices for commodities plummet and the exchange rate undercuts other industries.  Furthermore, the housing market has shown some signs of weakness with lending rates higher and a similar situation forming across the boarder.  Looking beyond growth today, the dip in metal and energy commodity prices seemed to be more pressing for currency markets.  Exports of these necessary goods account for a bulk of the total trade balance, so high prices are desirable, especially with such unfavorable exchange rates.  In energy markets this morning, the biggest impact for the Canadian unit came from the 0.9 percent drop in crude oil prices to $62.20 per barrel.  This was accompanied by a 0.4 percent drop in gold to $598.90 per troy ounce.

Canada’s benchmark index was stalling out on its near 400-point rally on Friday as energy shares pulled-back and fears of weaker US demand anchored the broad market.  The SP/TSX Composite was trading at 11,800.45 after slipping 16.99 points or 0.14 percent by 16:45 GMT.  Amongst the energy group, oil and gas producer Petro-Canada was pacing the decline with a C$0.86 drop to C$44.77.  Canada’s second largest natural gas producer Canadian Natural Resources followed suit with a C$1.93 drop to C$50.73.  Also weighing heavy in the market was the 0.4 percent decline in financials.  The nation’s largest bank, Royal Bank of Canada slipped C$0.41 to C$49.89.

In debt markets, the restocking in the pace of growth was enough to draw out some speculation that a rate hike could come in the not-so-distant future if indicators continued to support it.  Paper with ten years until maturity was 0.14 percent lower at 99.94 while yields were 2 basis points higher at 4.01 by 16:45 GMT.