Loonie's Fate Hangs in the Balance as BoC Rate Cut Frenzy Sparks Volatility
BOC's rate cuts aim to boost economy but impact unclear. Forex traders should monitor economic data for CAD and bond yield direction.
Wednesday, 24th July, Week 30
Freeland's Balancing Act: Fiscal Prudence Meets Generational Fairness
Over the past five months, Canada's fiscal policy has been characterised by a delicate balancing act, as Finance Minister Chrystia Freeland attempts to reconcile ambitious social spending with a commitment to fiscal responsibility. The recently released Budget 2024 exemplifies this approach, outlining significant investments in areas like housing, healthcare, and green technology, while simultaneously emphasising declining debt- and deficit-to-GDP ratios. This approach can be defined as a blend of fiscal prudence and "generational fairness," aiming to address the needs of younger Canadians without burdening them with excessive debt. The budget projects a deficit of C$40 billion, or 1.4% of GDP, for 2023-24. In the coming five weeks, the focus will likely shift towards implementing the budget's measures, with potential updates on key initiatives like the new Canada Housing Infrastructure Fund and the Indigenous Loan Guarantee Program. The impact of fiscal policy on the macroeconomic situation has been largely positive, contributing to economic growth and social stability. However, the effectiveness of these investments in boosting long-term productivity and addressing structural challenges like housing affordability remains to be seen. Fiscal policy is crucial because it directly influences economic activity, social well-being, and long-term sustainability. By striking a balance between spending and revenue generation, the government can create a macroeconomic environment conducive to growth, stability, and fairness. For forex traders, understanding the government's fiscal priorities and their potential impact on economic indicators is essential for anticipating shifts in the Canadian dollar's value.
Canada's Economic Engine Sputters: Can Rate Cuts Reignite Growth?
Canada's economic situation has been characterised by a slowdown in growth over the past five months, as the impact of higher interest rates and persistent inflation weighs on consumer spending and business investment. The economy can be defined as being in a state of "moderate below-potential growth," with the Bank of Canada's July Monetary Policy Report projecting a 0.7% expansion in 2024, down from 1.1% in 2023. Over the next five weeks, the focus will be on whether the Bank of Canada's recent rate cuts can stimulate economic activity and counter the negative impact of higher borrowing costs. The impact of the economic slowdown on the macroeconomic situation has been significant, contributing to a rise in unemployment, a decline in housing activity, and a weakening of the Canadian dollar. However, the recent easing of inflation and the prospect of further rate cuts could help to improve sentiment and support a gradual recovery. The nation's economic situation is important because it directly influences the well-being of Canadians, the value of the Canadian dollar, and the attractiveness of Canada as an investment destination.
GDP Growth:
Q1 2024: +0.4% (quarter-on-quarter)
Annualised Q1 2024: +1.7% (below expectations of 2.2%)
May 2024 GDP MoM: 0.3%
Forecast: The BoC projects GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The next five weeks could see further data releases on Q2 GDP, providing insights into the effectiveness of recent rate cuts.
Inflation:
June 2024: +2.7% (year-on-year), down from 2.9% in May
Core Inflation (June 2024): +1.9% (year-on-year)
Forecast: The BoC expects CPI inflation to stabilise around the 2% target in 2025. The next five weeks will see the release of July inflation data, which will be crucial for assessing the trajectory of price changes.
Labour:
June 2024 Unemployment Rate: 6.4%, up from 6.2% in May
June 2024 Employment Change: -1.4K, significantly below expectations of a 22.5K increase
Forecast: The unemployment rate is expected to remain elevated in the coming weeks, reflecting the lagged impact of higher interest rates. The July Labour Force Survey, due in week 32, will provide further insights into the health of the labour market.
Housing:
June 2024 Housing Starts: 241,672 units, down 9% from May
June 2024 New Housing Price Index: -0.2% (month-on-month), the first decline in five months
Forecast: Housing activity is expected to remain subdued in the coming weeks, as higher borrowing costs continue to weigh on demand. The July Housing Starts data, due in week 33, will be closely watched for signs of a potential rebound.
Business Confidence:
June 2024 S&P Global Manufacturing PMI: 49.3, indicating continued contraction in factory activity
June 2024 Ivey PMI: 62.5, signalling strong economic growth
Forecast: Business confidence could improve in the coming weeks if the rate cuts begin to stimulate economic activity. The August S&P Global Manufacturing PMI, due in week 32, will provide further insights into the manufacturing sector's performance.
Consumer Sentiment:
May 2024 Retail Sales: -0.8% (month-on-month), the sharpest decline in 14 months
Unofficial estimate for June 2024 Retail Sales: -0.3% (month-on-month), based on 50.3% of company responses
Forecast: Consumer sentiment could improve in the coming weeks if inflation continues to ease and the labour market stabilises. The June Retail Sales data, due in week 34, will be a key indicator of consumer spending patterns.
Trade:
May 2024 Balance of Trade: C$-1,926.9 million deficit
Forecast: The trade balance is expected to remain volatile in the coming weeks, influenced by global demand and commodity prices. The June Balance of Trade data, due in week 31, will provide further insights into Canada's trade performance.
BoC's Rate Cut Gamble: Will Lower Rates Revive the Loonie?
Over the past five months, Canada's monetary policy has undergone a significant shift, as the Bank of Canada pivoted from an aggressive rate-hiking cycle to a series of rate cuts. After holding its policy rate at 5% for ten months, the BoC implemented two consecutive 25 basis point cuts in June and July, bringing the rate down to 4.5%. This shift can be defined as a move towards a "loosening" monetary policy stance, aimed at stimulating economic activity and countering the negative impact of higher borrowing costs. In the coming five weeks, the focus will be on whether the BoC will implement further rate cuts and how these cuts will impact the Canadian dollar. The impact of monetary policy on the macroeconomic situation has been significant, contributing to a weakening of the Canadian dollar and a decline in housing activity. However, the rate cuts are expected to eventually stimulate economic growth and support a gradual recovery. Monetary policy is crucial because it directly influences interest rates, inflation, and the value of the Canadian dollar. By adjusting its policy rate, the BoC can influence borrowing costs, consumer spending, business investment, and ultimately, the overall health of the economy. For forex traders, understanding the BoC's monetary policy stance and its potential impact on economic indicators is essential for anticipating shifts in the Canadian dollar's value. The BoC's July Monetary Policy Report states that "If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate." This suggests that the central bank is prepared to continue easing monetary policy if inflation continues to moderate.
Risks on the Horizon: From Global Uncertainty to Household Spending Woes
Top Three Risks (Previous Five Months):
US Tech Earnings Disappointment (July 23rd): Disappointing earnings reports from US tech giants Alphabet and Tesla sparked a sell-off in global equity markets, reducing investor risk appetite and weighing on the Canadian dollar.
Key Developments:
Alphabet missed on YouTube advertising revenue.
Tesla reported a 7% drop in auto revenue.
Visa saw a slowdown in payments volume and processed transactions.
Canadian Wildfires (May-July): Wildfires in Canada disrupted oil production, raising concerns about supply disruptions and supporting oil prices. The International Energy Agency estimates that over 10% of Canada's oil sands production has been impacted.
Key Developments:
WTI crude oil futures rose towards $78 per barrel.
OPEC+ extended production cuts to counter potential supply shortages.
The risk of further disruptions persists as wildfires continue.
Canadian Household Debt Burden (March-July): Rising interest rates have increased debt-servicing costs for Canadian households, particularly those with variable-rate mortgages. This has weighed on consumer spending and raised concerns about the potential for a sharper economic slowdown.
Key Developments:
The BoC highlighted the risk of weaker-than-expected household spending in its July Monetary Policy Report.
Consumer credit growth has slowed, and delinquencies are rising.
Households are allocating a larger share of their income to debt payments.
Top Three Risks (Following Five Weeks):
US Q2 GDP and PCE Inflation Data (July 25th-26th): The release of advance estimates for US Q2 GDP growth and the PCE price index for June could significantly impact market expectations for the Federal Reserve's monetary policy path, influencing the Canadian dollar and bond yields.
Bank of Japan Monetary Policy Decision (July 28th, Week 31): The BOJ's decision on whether to further adjust its yield curve control policy could impact the yen's value and influence global risk sentiment, potentially affecting the Canadian dollar.
Canadian Labour Force Survey (August 9th, Week 32): The release of the July Labour Force Survey, including data on the unemployment rate and employment change, will be crucial for assessing the health of the Canadian labour market and the effectiveness of the BoC's recent rate cuts.
Conclusion: Navigating Uncertainty in Canada's Economic Landscape
Canada's macroeconomic outlook remains uncertain, as the economy grapples with the lagged impact of higher interest rates, persistent inflation in certain sectors, and a cooling labour market. The Bank of Canada's recent rate cuts are a gamble aimed at stimulating economic activity, but their effectiveness remains to be seen. Forex traders should closely monitor key economic data releases in the coming weeks, including US Q2 GDP and PCE inflation, the Bank of Japan's monetary policy decision, and the Canadian Labour Force Survey, for insights into the trajectory of the Canadian dollar and bond yields.
Key Events to Watch:
Week 31:
Bank of Japan Monetary Policy Decision (July 28th, Sunday)
Canada Balance of Trade (July 3rd, Wednesday)
Week 32:
Canadian Labour Force Survey (August 9th, Friday)
US S&P Global Manufacturing PMI (August 2nd, Tuesday)
Week 33:
Canada Housing Starts (August 16th, Tuesday)
Week 34:
Canada Retail Sales (August 23rd, Friday)
Sources:
Bank of Canada Monetary Policy Report (July 2024)
Bank of Canada Press Conference Opening Statement (July 24, 2024)
Statistics Canada
Trading Economics
S&P Global
Ivey Business School
Canada Mortgage and Housing Corporation
Newsquawk
Stratfor
Budget 2024