Economic Resilience Amidst Global Headwinds
Saturday, 21 September, Week 38
Welcome to this comprehensive report designed for forex traders seeking to gain a deeper understanding of the Canadian dollar, its connection to the Canadian economy, and the ever-volatile oil market. Our aim is to equip you with actionable insights, gleaned from analysing market movements, economic indicators, and the BoC's stance.
Note that the audio is a conversation about the findings in this report. It is experimental AI, created by Google NotebookLM.
Dominant Theme: Bank of Canada’s Cautious Easing
The prevailing sentiment surrounding the Canadian economy and the CAD over the past month has been shaped by the BoC's cautious approach to its rate-cutting cycle. The central bank has implemented three consecutive 25 bps reductions since June, but recent comments from Governor Macklem suggest a potential slowdown in the pace of cuts, creating uncertainty about the BoC's commitment to aggressive easing.
Timeline:
September 4th, 2024 (Week 38): The BoC cut rates by 25 bps, bringing the policy rate to 4.25%. Governor Macklem's comments during the press conference suggested a potential slowdown in future cuts, raising questions about the BoC's commitment to aggressive easing.
August 2nd, 2024 (Week 31): The BoC implemented its second 25 bps rate cut, confirming the central bank's dedication to economic stimulus and addressing slowdown concerns.
June 5th, 2024 (Week 23): The BoC began its rate-cutting cycle with a 25 bps reduction, acknowledging the slowing economic growth and signalling the need for support.
Emerging Theme: Soft Landing Hopes Fuel Volatility
The CAD's performance has been marked by its resilience amidst global market volatility, particularly after the Fed's aggressive rate cut. This resilience suggests potential opportunities for forex traders seeking stability amidst global uncertainty.
Timeline:
September 20th, 2024 (Week 38): The CAD weakened against the USD, reaching 1.358, as the USD strengthened following Fed Chair Powell's statement that the Fed was not rushing to further ease monetary policy. However, positive Canadian economic data, particularly the surge in building permits, limited the decline.
September 19th, 2024 (Week 38): The CAD appreciated against the USD, reaching 1.260, as the Fed's rate cut sparked a global risk-on rally and oil prices rose.
The Geopolitical Landscape
Canada, as a major oil exporter, is sensitive to global energy market disruptions. The recent escalation of tensions in the Middle East, following the July assassination of a Hamas leader, has triggered supply concerns and driven oil prices to yearly highs. This geopolitical instability has impacted Canadian energy stocks, pushing them higher, and has provided a tailwind for the CAD.
Looking ahead, the situation in the Middle East will be closely monitored for any escalation that could further disrupt oil supply chains. The ongoing conflict in Ukraine, with its impact on global commodity markets and potential for broader geopolitical repercussions, also remains a concern.
Fiscal Policy
Canada boasts a strong fiscal position, characterised by low debt-to-GDP ratios and responsible management. The government aims to balance the budget while investing in key areas to stimulate economic growth. Budget 2024 highlighted the commitment to reducing the federal debt-to-GDP ratio while investing in areas like affordable housing, clean energy, and innovation. However, the narrowing budget surplus in May 2024, down to CAD 1.1 billion from CAD 3.35 billion a year earlier, suggests mounting fiscal pressures.
Canadian Parliament
In the upcoming month, the government will likely prioritise implementing the initiatives outlined in Budget 2024, particularly those related to affordable housing and clean energy, which could significantly impact the economy and the CAD.
Economic Fundamentals
The Canadian economy has shown resilience, exceeding expectations and avoiding recession. Q2 GDP growth surpassed forecasts at 0.5%, but the manufacturing sector continues to contract, as reflected in the July Manufacturing PMI reading of 47.8. This weakness in manufacturing and the 6.4% unemployment rate indicate potential headwinds.
Adding to the mixed economic picture is the unexpected decline in employment in July, with a loss of 2.8K jobs. However, robust housing starts data for July, showing a 16% surge to 279,500 units, offers some hope for the construction sector and suggests a potential recovery in the housing market.
Looking ahead, the August retail sales data, due on Friday, September 27th, could be a key indicator for the Canadian economy. A strong reading could signal a rebound in consumer spending and support the CAD, while a weak reading could reinforce concerns about slowing growth.
Monetary Policy
The BoC has been active in managing monetary policy, transitioning to an easing cycle in June after a period of rate hikes. They implemented their third consecutive 25 bps rate cut on September 4th, bringing the policy rate to 4.25%.
While the initial cuts signalled a move towards easing, Governor Macklem's recent comments suggest a potential moderation in the pace of future cuts, creating uncertainty for traders.
The upcoming Monetary Policy Report, due in late October, will be a pivotal event for the CAD, offering insights into the BoC's assessment of the economic outlook and future policy decisions.
Macroeconomic Outlook
The macroeconomic outlook for Canada in the coming month suggests moderate growth but with persistent challenges. The BoC's easing cycle will provide some support, but the impact of high interest rates on consumer spending and business investment continues to weigh on the economic recovery. The persistent contraction in the manufacturing sector and a slowing global economy add further headwinds.
The possibility of a US recession and its potential spillover effects on the Canadian economy, along with the impact of escalating geopolitical tensions on oil prices, remain key risks.
Key Economic Indicators to Watch
GDP MoM (JUL) - Canada: Forecast: 0.00%, Previous: 0.00%. Due: Friday, September 27th, Week 38 (Lagging). A positive reading would suggest continued economic expansion, potentially supporting the CAD. If the actual result aligns with the forecast of 0.00%, it could fuel speculation about further BoC rate cuts, potentially weakening the CAD.
GDP MoM Prel (AUG) - Canada: Forecast: 0.10%. Due: Friday, September 27th, Week 38 (Lagging). A positive reading could signal a continuation of the economic recovery, potentially supporting the CAD. An in-line result would likely have a muted impact, reinforcing the narrative of moderate but ongoing expansion.
S&P Global Manufacturing PMI (SEP) - Canada: Forecast: 51.5, Previous: 49.5. Due: Tuesday, October 1st, Week 39 (Leading). A reading above 50 would signal an expansion in the manufacturing sector, potentially supporting the CAD. A result aligned with the forecast would suggest a return to growth in manufacturing, potentially boosting the CAD.
Conclusion
The CAD has navigated a volatile market environment, influenced by the BoC's easing cycle, global economic uncertainty, and fluctuating commodity prices. While the economy has shown resilience, concerns about growth persist due to high interest rates and global slowdown.
The forex market for the CAD in the upcoming week will likely be driven by the release of GDP and manufacturing PMI figures. Positive data could reinforce the CAD's strength, while disappointing data could lead to weakness. The geopolitical landscape and oil price movements remain key factors to watch for their impact on the CAD.
Here are three key takeaways for forex traders:
The BoC's cautious approach to easing and the potential for a moderation in the pace of future rate cuts add uncertainty for the CAD.
Upcoming economic data, especially GDP and manufacturing PMI, will be crucial for the CAD's short-term outlook.
Geopolitical tensions and their impact on oil prices will continue to influence the CAD.
Sources
This report was compiled using data and analysis from:
Bank of Canada
Statistics Canada
Ivey Business School
Trading Economics
Bloomberg
Reuters
Financial Juice