Canada will see the release of Q4 2017 as well as December GDP figures on Friday at 1330 GMT. Quarterly annualized growth figures are projected to show an improvement after Q3’s slump in economic activity, while monthly figures are anticipated to show that expansion eased during the last month of the year. Market participants may assign greater weight on the numbers that would otherwise have been the case, given that they will be released a few days before the Bank of Canada next meets to set its monetary policy moving forward.
The annualized pace of quarterly growth during the last quarter of 2017 is expected to stand at 2.0%. This compares to Q3’s respective figure of 1.7% that followed Q2’s 4.3% – this being the strongest rate of growth since Q2 2014. The slowdown in Q3 came on the back of a considerable decline in exports, as well as due to businesses holding back on investments. The latter was likely attributed to uncertainty over the future of the North American Free Trade Agreement (NAFTA). December’s monthly growth figure is projected to stand at 0.1%, down from November’s 0.4%
The BoC, the first major central bank to deliver a rate hike so far this year, will be concluding its two-day meeting on monetary policy on March 7. Given that Friday’s release will constitute the last growth input before the Bank’s meeting, this might increase the significance of the release in investors’ minds, with a deviation from forecasts leading to sharper movements than would otherwise have been the case; of course, the extent of the deviation is also a factor that is under consideration.
A data beat is anticipated to be met with long loonie positions and focusing on the Canadian dollar versus its US counterpart, lead to a buildup of short dollar/loonie positions. Market participants could potentially revise their expectations for additional rate hikes by the BoC in sight of strong readings, bringing them sooner in time than previously thought. In this case, dollar/loonie might find support around the 1.28 handle which was congested in the past. Steeper declines would shift the focus to the area around the current level of the 200-day moving average at 1.2686. The range around this point also encapsulates the 1.27 handle that may carry psychological importance and was also congested in the past.
Dollar/loonie has advanced considerably after hitting a five-month low of 1.2246 on January 31, recording a more than two-month high of 1.2854 during Thursday’s trading. If growth numbers surprise to the downside, the pair is likely to build on positive momentum, targeting the area around the seven-and-a-half-month high of 1.2918 that was recorded on December 19.
For the record, no change in the BoC’s policy rate is expected next Wednesday, with Canadian overnight index swaps currently assigning only a 10% probability for a quarter percentage point interest rate increase, something which would see the policy rate rising to 1.5%.
A major driver for the loonie moving forward is the future of NAFTA negotiations. Those are currently on their seventh round, with no meaningful progress so far recorded. Rising uncertainty on this front has in the past hurt the Canadian currency. Oil prices could also give direction to the currency as Canada is a major exporter of the precious commodity. Those have eased somewhat in February after hitting a three-year high in January. It is noteworthy that the International Energy Agency said on Tuesday that US shale production is set to rapidly increase, with the US overtaking Russia as the world’s biggest oil producer by 2019 the latest. Such an outcome does not paint a bullish picture for oil prices moving forward, which in turn could lead to losses for the loonie.
