Today we had the release of GDP figures from Canada both for the June, as well as for the second quarter. It was a mixed result as the monthly change came in a bit better than expected, but we did see disappointing second quarter results.

First let's have a rundown of the statistics:

  • For June, on the month, we saw GDP rise 0.2%, which was slightly better than expectations.
  • Looking at June year-over-year GDP rose 2.0% which was also slightly better than expectations of a 1.9% increase.
  • For the 2nd Quarter, GDP in quarterly terms fell 0.1%.
  • In annualized terms that was a 0.4% decline for the 2nd quarter, which was weaker than the flat reading expected by economists.
  • The annualized rate for the first quarter was revised down to show a 3.6% increase compared to the 3.9% increase previously reported.

If we look at the second-quarter figures Canada's economy shrank which made the report initially seem quite negative. That contraction means that Canada is only the second G-7 country, along with Japan, to post negative growth during the quarter. It's the first quarter in which the country has contracted in two years.

But the saving grace in this report is that the June figures were slightly better than anticipated and that help the Canadian dollar to shrug off initial weakness. Canada's finance minister reiterated that point in a statement following the release of the GDP data. He said that June's figure was encouraging and that despite the second quarter contraction Canada's economy remains on track. That the country's economic fundamentals are sound and that the Bank of Canada has more room to move than the Fed. The also said that the strong Canadian dollar partly reflects strong fundamentals as well as strong corporate balance sheets. However in this time of fragile growth globally Canada's GDP showed it causing economic output in the second quarter.

The markets therefore may take to decline in the second quarter as a reaction to temporary factors and expects a bounce back in the third quarter and why the Canadian dollar was not weaker following the report.

While the reaction to the report was slightly mixed I do want to want to focus on those second-quarter changes as this will have an important impact in the medium term for the Canadian economy, expectations for the Bank of Canada, and the Canadian dollar.

Here's a look at the quarterly chance in Canada as well as the contributing factors to the decline:

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Let's go ahead and break down the change in quarterly terms:

  • Exports fell 2.1% from the prior quarter which was the sharpest drop in two years and that was dragged down by 6.7% decline in energy.
  • Imports rose 2.4% and if we take a look at the decline in exports with an increase in imports that means that overall net trade was a large drag on the economy.
  • Consumer spending increased 0.4% in the first quarter which was a better reading that we had in the first quarter when spending was flat.
  • Business investment in factories and equipment climbed 3.7%, with investment by companies up 7%. Investment in new housing meanwhile slowed to 0.2% increase compared to the first quarters 1.8%.
  • Production of vehicles and parts fell by 6% on the back of supply chain disruptions as a result of the earthquake and tsunami in Japan in March.

Taking a look at these figures what we want to see going forward is production especially of motor vehicles rebound as well as a shift back into a favorable export position for the economy as trade was a dominant factor in dragging down growth.

Implications on the CAD

Taking a step back from the raw data, the implications of this release is that the Bank of Canada is now less likely to raise interest rates anytime soon. Not only did its economy falter in the 2nd quarter but we also have a very slow pace of recovery in the US - Canada's main trading partner.

It was only back on July 19 when expectations for an interest rate increase from the Bank of Canada had accelerated because of the way the bank phrased their interest rate statement, saying that a rate increase was not far off. That had prompted markets to price in expectations of an interest rate increase. However those expectations were scaled down already because of the turmoil in financial markets, and following this release will be pared back even further. We may even see a move to price in an interest rate cut from the Bank of Canada which would be a negative for the Canadian dollar.

But in today's very near-term market action we saw brisk on trading as equities in North America gained and in general that help to support the Canadian dollar in today's morning New York session. we'll see if the Canadian dollar can hold those gains the rest of the day and going forward following this GDP release.

Nick Nasad
Chief Market Analyst
FXTimes