Canadian GDP may help CAD recover

• Canadian growth has probably picked up in the first quarter according to analysts.
• The BOC downplayed expectations for the first quarter, allowing more room for surprise. 
• The Canadian dollar is set to benefit from a faster expansion driven by jobs.

It is hard to warm up in the cold Canadian winter – and the same probably applied to the economy in the first quarter of the year.

After growth cooled down to a meager of 0.4% annualized in the last quarter of 2018, economists are expecting a faster expansion of 1.2%. Nevertheless, even with triple the previous rate, Canada will substantially lag the US which grew by 3.1% annualized.

The oil sector suffered from lower prices and reduced production and the housing sector also stalled early in the year. Both sectors are picking up at the moment – but that was not the case in the first three months of the year.

The silver lining for the Canadian dollar is that a modest acceleration is not only what economists expect but also what the Bank of Canada portrayed. The BOC acknowledged the slowdown in early 2019 in their May 29th rate statement. They foresee a pickup coming shortly afterward – as soon as the current quarter and despite the flare-up of the US-Sino trade war.

Low expectations may result in a stronger CAD

Overall, economists’ expectations for 1.2% annualized – made before the BOC’s decision – sound reasonable. However, the Ottawa-based institution’s words echo in traders’ heads and real expectations may be somewhat lower.

If GDP comes out at 1.2%, the Canadian dollar may have room to rise, and if growth bounces above 1.2%, the loonie may extend its gains. The recent jobs boom adds to the bullish case. Canada is experiencing a hiring boom in the past six months and consumption data has not fully reflected the potential shopping spree that is usually the result of rapid jobs growth. A bump up in consumption may result in a faster expansion of the economy.

For the Canadian dollar to fall, GDP growth would probably need to fall below 1.0% – a number that would also be of psychological importance. Yet as mentioned earlier, this is unlikely.

USD/CAD has been grinding higher in recent weeks as the US dollar gained ground on trade-war-related flows. However, the loonie has shown its resilience. A small boost from upbeat GDP data may be enough to result in high volatility – but it could change the trend and perhaps send USD/CAD trending gradually lower.