THE TAKEAWAY: [Canadian 1Q GDP growth slower than Bank of Canada’s forecast] > [Rate hike unlikely in near term; BoC could soften hawkish tone] > [CAD weakens vs. USD]

The Canadian economy expanded at a slower rate in the first quarter than the Bank of Canada (BoC) had forecast in January. First quarter Gross Domestic Product (GDP) grew at an annualized rate of 1.9 percent compared with the central bank’s forecast of 2.5 percent, and remained unchanged from fourth quarter growth. This falls in line with the consensus forecast of 27 economists surveyed by Bloomberg News.

GDP grew a miserly 0.1 percent from a month ago in March after contracting by 0.2 percent the previous month. On an annual basis, GDP grew 1.6 percent in March, which falls short of expectations for 1.9 percent growth. Growth was fueled by business investment in plant and equipment, and housing investment, while consumer spending on goods and services slowed in the first quarter and demand for exports softened.

With first quarter growth falling short of the BoC’s projections, we are unlikely to see the Bank follow through on plans to raise interest rates any time soon. The Bank’s hawkish tone in its last policy statement had fueled speculation of a hike in interest rates, but today’s print could prompt the Bank to soften its tone at its next rate decision meeting next Tuesday.

USDCAD 1-minute Chart: June 1, 2012

Canada_First_Quarter_GDP_Falls_Short_of_Bank_of_Canada_Projections___body_Picture_2.png, Canada First Quarter GDP Falls Short of Bank of Canada Projections

Chart created using Market Scope – Prepared by Tzu-Wen Chen

In the minutes following the data release, the loonie weakened against the greenback, falling as much as 53 pips in the first five minutes. At the time of this report, the Canadian dollar continued to trade lower, with the USDCAD pair trading at around C$1.0412.

--- Written by Tzu-Wen Chen, DailyFX Research