Canadian Dollar Surges After Economy Roars Back to Life - Drowning out the Doubters

Friday’s data comes amid increased uncertainty for the Canadian economy and the Dollar. Higher rates, slower growth and NAFTA risk are all in focus.

The Canadian Dollar surged in noon trading Friday after the latest GDP and labour market data showed the economy roaring back into life after an earlier summer-slump.

Statistics Canada data shows the economy growing at a rate of 0.2% in the September month, more than reversing the -0.1% contraction seen in August, and ahead of the consensus forecast for growth of 0.1%.

This takes growth for the third-quarter to 0.4%, which is down from the 1% seen in the second quarter, but ahead of where it could have been had the consensus forecast been realised. The annualised pace of third-quarter growth was 1.7%.

Household consumption was the main driver behind recent growth while a fall in exports served to moderate the pace of expansion somewhat.

“All told, some great numbers on the monthly GDP front and on jobs, which should support the loonie and dent fixed income,” says Nick Exarhos, an economist at CIBC Capital Markets.

Separately, the labour market also defied its doubters, adding 79.500 new jobs during November when consensus had put the month's likely gain at the 10,200 level.

Faster than expected jobs growth helped to drive a steeper-than-forecast fall in the unemployment rate for the recent month, with the jobless rate dropping 40 basis points to 5.9%.

“Encouragingly, employee compensation grew at roughly a 5%-plus annualized rate, which will be needed to support consumption ahead with the savings rate edging two ticks lower to a slim 2.6%,” Exarhos adds.

Consensus had put the month’s likely unemployment rate at 6.2%, down only a fraction on the previous month.

The Canadian Dollar extended earlier gains over the Pound in response, with the Pound-to-Canadian-Dollar rate falling close to 200 points, from 1.7400 to 1.7214.

Above: Pound-to-Canadian-Dollar rate shown at hourly intervals.

The US Dollar was also sideswiped by the report, with the USD/CAD rate dropping 120 points, from above 1.2880, to trade around 1.2770.

Above: USD/CAD rate shown at hourly intervals.

Friday’s data comes amid increased uncertainty for the Canadian economy and its Dollar.

In recent months, growth slowed markedly from its Spring levels, leading to the first monthly contraction (August) since December 2016.

Concerns over a bubble, and possible downturn, in the Toronto and Vancouver housing markets remain elevated. The Bank of Canada raised the cash rate twice, in two back to back meetings during the summer, taking it back to 1%.

The ultimate impact that higher interest rates will have on debt-laden households is not yet known.

However, the slowdown in growth has already soured sentiment toward the Loonie, to the point where it has largely shrugged off a 25% gain for oil prices in the recent quarter.

Until late October, traders stacked bullish bets on top of bullish bets, taking the market’s net-long position to a three-year high, in anticipation of further increases to the Canadian cash rate during the months ahead.

Now, these are unwinding steadily as interest rate derivative and bond market pricing becomes increasingly pessimistic on the the idea the BoC might move northward again in the coming months.

Some economists even say the Bank of Canada may be forced to reverse its recent rate hikes once into 2018, if the housing market tanks and the economy slows further.

Meanwhile, uncertainty over the fate of the North American Free Trade Agreement and the question of whether Canada and the US can automatically default back to their earlier agreement offers to keep a lid on the Dollar in the interim.

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