USDCAD: Will the Canadian Dollar Give Back as GDP Contracts?

The Canadian economy is anticipated to contract 0.4% in August as the slowdown in the global economy intensifies.

Trading the News: Canadian Gross Domestic Product

What’s Expected

Time of release:                  10/31/2008 12:30 GMT, 08:30 EST

Primary Pair Impact :          USDCAD

Expected:                              -0.4%

Previous:                               0.7%

Impact the Canadian GDP numbers had on USDCAD over the last 3 Quarters

July 2008 Canadian Gross Domestic Product

The Canadian economy expanded 0.7% in July, to reach its fastest pace of growth since March 2004. The breakdown of the report showed that manufacturing activity increased to 1.3% from the previous month, which was followed by a 3.1% gain in energy production. Despite the bigger than expected rise in GDP, the downturn in the U.S. paired with the spillover effects of the credit crunch has sparked fears of a global recession, which has raised speculation that the Bank of Canada will opt to lower the interest rate as demands from the global economy falter. Moreover, the recent pullback in oil prices has certainly helped to anchor inflation expectations, and only strengthens the argument for the BoC to lower borrowing costs as growth prospects for the major economies around the world deteriorate.

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June 2008 Canadian Gross Domestic Product

Growth prospects for Canada improved in June as GDP rose 0.1% from the previous month. The data crossed the wires inline with expectations, and has certainly helped to ease fears of a recession. Despite the minor improvement, the economic slowdown in the U.S. continues to stoke growth concerns as the world’s largest economy consumes nearly 80% of Canada’s exports. Fading demands from the U.S. have clearly dragged on the Canadian economy, and may continue to do so over the coming months as the downturn in the American housing sector intensifies. In addition, sluggish growth throughout the first half of the year has also fueled speculation that the Bank of Canada will look to lower the benchmark interest rate in the months ahead as growth prospects deteriorate.

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May 2008 Canadian Gross Domestic Product

Economic activity in Canada unexpectedly weakened in May as export demands from the U.S. faltered. GDP slipped 0.1% from the previous month, which crossed the wires much weaker than the 0.2% gain projected by economists. A breakdown of the report showed that mining outputs declined 1.2%, while construction orders fell for the third consecutive month. The slowdown in the world’s largest economy has certainly dragged on Canada, and conditions may only get worse as the downturn in the housing and credit market accelerates. The dour outlook for the U.S. and Canada could lead the BoC to focus on growth over the coming months, and has already raised bets that the central bank will lower the benchmark interest rate during the second half of the year as growth prospects turn dim.

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How To Trade This Event Risk

The Canadian economy is anticipated to contract 0.4% in August as the slowdown in the global economy intensifies. Fading export demands from around the globe pushed firms to cutback on production despite the recent pullback in input costs as the Ivey PMI plunged to 51.5 from 65.5 in July. In addition, manufacturing shipments slipped for the first time in five months as the index declined 3.7% in August. Meanwhile, personal consumption also weakened in August as retail spending fell 0.3%, and was followed by a 1.5% decline in wholesale sales. Narrowing demands from the domestic and the global economy has certainly taken a toll on the world’s eighth largest economy, which could lead the Bank of Canada to ease policy further over the coming months as U.S. slips into a recession. Earlier today, we saw that the U.S. economy contracted 0.3% in the third quarter, which could stoke increased growth fears for Canada as the world’s largest economy consumers nearly 80% of Canadian exports. Meanwhile earlier this month, the BoC took a preemptive approach in supporting growth as they joined the Fed on October 8th to lower the interest rate by 50bp to 2.50, but went even further and cut an addition 25bp on October 21st to hold the interest rate at 2.25%. The extraordinary steps taken by the central bank suggests that economic activity is indeed slowing at a faster pace than Governor Mark Carney expected, and may lead the Bank of Canada to lower borrowing costs even further over the coming months.

Despite expectations for additional rate cuts by the BoC, the Canadian dollar has strengthened against the greenback this week, and an improved growth figure could stoke increased buying pressures for the loonie. Therefore, we will look for a GDP reading of 0.1% or greater for a long Canadian dollar trade (short USDCAD), and will keep an eye out for a red, five-minute candle following the release to confirm entry on two lots of USDCAD. Our initial stop will be placed at the nearby swing low (or reasonable distance), and this risk will determine our target for the first lot. The second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first takes profit.

On the other hand, increased bets for another rate cut paired with negative growth figures would certainly trigger bearish sentiment for the Canadian dollar, which would favor a short Canadian dollar trade (long USDCAD). As a result, we will follow the same strategy for the short position as the long trade mentioned above, just in reverse.