CAD: Growth figures provide a look in the rear-view mirror – Commerzbank

In Canada, the effects of Donald Trump's trade war were clearly evident in the second quarter, with the economy contracting by 1.6% quarter-on-quarter (annualised). This was well below the expectations of analysts surveyed by Bloomberg, despite the Bank of Canada having recently predicted a similar slump. However, as is often the case, a closer look is needed: private consumption grew considerably. Companies fared worse, with investments being significantly scaled back. In addition, exports practically collapsed (annualised minus 27%), Commerzbank's FX analyst Michael Pfister notes.

CAD more attractive against the USD

"Nevertheless, the figures have once again made it clear that the Canadian real economy is probably suffering the most from the US trade war worldwide. Sentiment indicators are only slowly recovering from their historic slump in spring. For example, PMIs are still below the neutral level of 50, although the services PMI has recently recovered significantly. We have repeatedly emphasised that the labour market has been weakening for several months now."

"So why did the CAD react with only slight weakness despite these figures? Growth figures usually provide a backward-looking view, and given the weak sentiment indicators in the second quarter and the central bank's forecast, it is unlikely that the figures have changed the overall picture much. The central bank is close to the end of its interest rate reduction cycle. Although a further interest rate cut is now more likely, it is unlikely that there will be any significant cuts into expansionary territory."

"The upcoming data is likely to be much more significant for the CAD. For example, if the PMIs or the labour market report for August, due this week, indicate that weakness has continued into the third quarter, this would be a bad sign for the CAD. However, continued solid private consumption and slowly recovering sentiment indicators, as well as the fact that Canada only received a slight further increase in US tariffs at the beginning of August, give hope that the figures will at least stabilise. Another factor to consider for USD/CAD is that, in recent months, the Canadian real interest rate has decoupled from its US counterpart. The Fed's impending interest rate cuts, combined with rising US inflation risks, are likely to reverse this trend, making the CAD more attractive against the US dollar."