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One of the morals from the classic Hans Christian Andersen story, The Emperor's New Clothes - in which it takes a naively honest child to risk appearing 'extraordinarily simple of character' and point out that the Emperor is in fact wearing nothing at all - is that even generally accepted views should be questioned if contradicted by the facts. In that spirit, we re-examine a commonly held view: that the Canadian economy is significantly underperforming relative to both the U.S. and its longer-run production potential. Taking a step back and looking at recent data in a historical context at the least suggests that this argument is not as one-sided as it may at first seem. This was true even before a run of strong economic data in early 2017 for Canada (with Canadian growth in Q1 2017 tracking, by most estimates, a third consecutive quarterly outperformance relative to the U.S.) as, arguably, underperformance of the Canadian economy in the immediate aftermath of the oil price shock never did fully retrace the outperformance relative to other advanced economies accumulated earlier in the recovery from the 2008/09 recession.

Although there remain legitimate reasons to be concerned about the future of the Canadian economy (the lack of business investment growth, even excluding the energy sector, has created concerns about the pace of future productivity growth, for example), even with the shock to the oil & gas sector over the last two years Canada has retained its position as the G7 GDP growth leader relative to pre-recession levels and recent momentum has improved. There has clearly been an increase in labour market slack in Alberta; however, improvement among most oil importing regions has offset to leave the national unemployment rate (and most other measures of labour market 'slack') at levels that historically have been consistent with the national economy operating at capacity. Wage growth has been disappointing according to some measures but less so in others and it remains the case growth in 'real' worker incomes in Canada have outpaced the U.S., where the economy is more widely accepted to be on a firmer footing, over the full recession/recovery period. Consumer price inflation trends in Canada, while ostensibly not concerning, are also arguably more similar to the U.S. than is commonly acknowledged and there have clearly been more worrying trends emerging in asset (particularly housing) prices in Canada.

Canada continues to lead the G7 countries in GDP growth from pre-2008/09 recession levels...

Canadian GDP growth slowed dramatically after oil prices started to decline sharply towards the end of 2014; however, that underperformance has not been enough to reverse outperformance in the period leading up to the oil price shock, including relative to the U.S. economy. 2015 marked just the second year since the recession that Canadian growth was weaker than in the U.S. (0.9% in Canada versus 2.6% in the U.S.) with the Canadian economy weighed down by the plummet in oil prices. This factor contributed to the Canadian economy underperforming the U.S. in 2016 again, on an average annual basis, but relatively modestly (1.4% versus 1.6%). The year started out slowly, with growth in the second quarter in particular weighed down by the Fort McMurray wildfires, but finished strongly. It remains the case that Canada has not yet relinquished its spot as the G7 growth leader when measured relative to activity just prior to the beginning the 2008/09 recession (Chart 1).

...and recent momentum has improved

Of course if weak momentum over 2015 and early 2016 were to persist, it would just be a matter of time before Canada's longer-run outperformance reverses; however, evidence is mounting that the economy is emerging from its slow patch. As shown in Chart 2, weakness in the Canadian economy over the last two years has been largely concentrated in the oil & gas sector. There was also some earlier slowing in nonenergy commodity sectors but non-commodity sectors (the other ~80% of the economy) have continued to grow, on balance, at a steady pace. We continue to expect the level of investment activity in the oil & gas sector to remain subdued relative to earlier 2014 levels because oil prices remain below where they were. Nonetheless, weakness has clearly eased and some preliminary data (including a tick higher in investment intentions and recent increases in oil & gas drilling activity) suggests that the sector will shift back to a modestly positive contributor to growth in the near-term. Outperformance over the second half of 2016 in Canada left the year-over-year rate of growth in GDP in the fourth quarter already equal to that of the U.S. at 1.9% and early data releases for 2017 have been constructive.

The regional composition has changed but the Canadian unemployment rate is still low...

Labour markets have clearly deteriorated in the oil-producing provinces, particularly in Alberta where the unemployment rate has increased sharply from low levels; however, improvement elsewhere - unemployment rates have declined in almost all of the net oil-importing provinces (Manitoba was the one exception although that province still had the second-lowest unemployment rate in the country in February, behind only B.C.) - suggests that the net impact has been more of a geographic shift in the location of labour market strength/weakness than a net impact on the 'national' labour market. The Canadian unemployment rate was 6.6% in February, slightly below its level at the end of 2014. The same pattern is importantly true using broader measures of labour market slack that account for 'hidden unemployment' in the form of discouraged workers or involuntary part-time employees (Chart 3).

The current national unemployment rate level is also, notably, still well-below its 7% 10-year pre-recession average, a period in which the Bank of Canada's historical estimates of the 'output gap' - which estimates the extent to which the economy is operating below (negative) or above (positive) its longer-run sustainable production capacity - were positive, on average. In other words, current levels of labour market 'slack' nationally are below levels that have historically been considered consistent with 'full-employment' at the national level.

...even when compared to the U.S.

Adjusting Canadian unemployment rate data to U.S. definitions - differences in the way the rates are calculated, in large part related to the definition of who is considered to be "in the labour force," typically add about a percentage point to the 'official' Canadian unemployment rate relative to the U.S. - the Canadian rate was 5.4% (on a seasonally adjusted basis) in February. That is still above the U.S. rate, which has declined to 4.7%, but that is not actually historically unusual. Prior to the 2008/09 recession and recovery period - over which Canada's labour market broadly outperformed the U.S. - the Canadian rate had not been below its U.S. equivalent since 1982 with the average gap over the pre-recession period (~2 percentage points) more than twice the current difference. Even in the boom-times in the energy sector ahead of 2008/09 the Canadian unemployment rate never dipped below the U.S. rate (Chart 4).

What about wage growth?

Tighter labour markets - in other words, rising demand relative to supply of labour, as evidenced by a smaller unemployment rate - should, so the theory goes, push wages higher and, admittedly, some indicators of wage growth have failed to show any significant upward pressure. One closely watched measure, hourly wages of permanent employees derived from Statistics Canada's monthly Labour Force Survey has been running just 1% above year-ago levels in January and February this year, without adjusting for inflation. The wage data, like most other Canadian labour force data, is also extremely volatile, however, and other measures have not been so disappointing. Hourly wage growth in the alternative labour market survey, the Survey of Payrolls, Employment, and Hours, has still been trending at slightly above a 2% rate, despite year-overyear declines in Alberta. Overall per-hour labour compensation costs rose 2.1% year-over-year in Q4/16 according to the quarterly productivity accounts data. Combining the employment and wage data, year-over-year growth in total aggregate real (inflation-adjusted) wage earnings was 2.1% in Q4 2016, slightly below the 2.5% U.S. increase but almost double the 1.2% rate a year earlier. Over the full economic cycle Canadian wage growth continues to run above comparable U.S. measures. Although the gap has been narrowing (in part because of weaker Canadian growth recently but also reflecting U.S. labour markets 'catching up' to those in Canada where the initial recession recovery was faster), total real wages and salaries in Canada are 17.2% above their Q4 2007 level (the last quarter before the U.S. entered recession) compared to 13.7% in the U.S. (Chart 5).

Consumer price growth still modest, but similar to the U.S....

Weak inflation trends are also often pointed to as evidence that the economy continues to operate well-below its potential (a symptom of an economy with insufficient demand, theoretically, should be weak price growth); however, here too the data is perhaps not as clearly one-sided as is often thought. Energy prices continue to be buffeted by oil price volatility and food price growth has been historically weak, reflecting a combination of earlier declines in agricultural commodity prices as well as industry-specific competitiveness factors. Excluding those, often volatile components, Canadian CPI rose 2.0% from a year ago in February. That was down just slightly from an almost 10-year high 2.2% in January. The latest reading was above the1.8% 10-year pre-recession average and was just slightly below the 2.2% February year-over-year gain in the equivalent, and closely-watched, U.S. measure (Chart 6).

....and clearly evidence of upward pressure on asset prices in some regions

Price pressure resulting from a stronger economy also does not necessarily have to manifest exclusively through prices for current consumption as measured by the CPI. Clearly some upward pressure on asset prices has emerged, particularly in some of the hotter residential real-estate markets. The normal counterpoint is that housing market heat has been largely contained to regions in and around Vancouver and Toronto, so housing market 'tightness' is not really a 'national' phenomenon requiring a 'national' policy response. The Canadian Real Estate Association (CREA) nonetheless noted in the release of their February statistics that almost 60% of local markets they track nationally were in 'sellers -market' territory. By our count, that share was about 40% a year ago and just a quarter the year before that. Most of those markets are admittedly still located in Ontario and B.C., but Ontario and B.C. together account for about half the Canadian economy. Over the last three months (ending in February), 75% of markets in Ontario and almost 60% of markets in B.C. saw average house price increases of 10% or more on a year-over-year basis. Those shares are both up from about 25% a year ago and closer to 10% in the same period in 2015. The question is at what point do these 'local' trends impact enough markets that they generate 'national' concerns for policymakers. Clearly, there has already been a significant impact on national-level measures of house prices. Canadian house prices were up 12.3% in 2016 according to CREA's benchmark house price index. In February, year-over-year growth in the measure hit a whopping 16%.

So how much 'slack' is there in the Canadian economy - and what should be done about it?

It is not possible to directly observe economic slack. Rather the extent to which the economy is utilizing its underlying productive resources needs to be inferred based on a mix of economic data, comparisons to historical performance over multiple business cycles, and economic theory. While there has clearly been an industrial and geographical reorientation of economic strength in recent years away from oil-producing regions and there have been disappointments - for example, weakness in business investment even excluding the oil & gas sector - we would argue that the balance of economic data at the least suggests that the argument that the Canadian economy as a whole is significantly underperforming both the United States and its own long-run production potential is not as one-sided as it may at first seem.

To be sure, saying that the economy nationally is, perhaps, closer to its longer-run production potential than is commonly thought does not mean that regional divergence in growth prospects should be ignored. It obviously doesn't make sense, for example, to argue that households in Alberta should be 'okay' with a 9% unemployment rate because the rate is now substantially lower in Ontario and B.C. The appropriate policy response is also, however, different in the case of a 'national' versus a 'regional' economic shock. Monetary policy stimulus (ie. low interest rates) has likely provided some benefit to activity in regions where economic activity is more subdued but the persistence of those rates at historically low levels also runs the risk of contributing to overheating in regions (particularly Ontario and B.C.) where activity has been significantly stronger and where, in some markets, worrying trends in house prices have clearly emerged. The closer the economy nationally is judged to be to its long-run production capacity the less appropriate low interest rates become as a policy response with targeted government fiscal policy measures (for example through re-training programs, investments in new industries/technologies to reduce reliance on the oil & gas sector, etc) better suited to deal with regional divergence in performance.

A modest risk off mindset engulfed investors to start the week, Not too surprisingly investors continued to ponder the US political musings while extrapolating just how negatively impactful the recent development would be from the viewpoint of both US fiscal and tax reform. While the deluge of repetitive headlines centred on finger pointing and speculative fragmentation amongst GOP members to the extent, it did become akin to flogging a dead horse. But mainly the bungled AHCA vote means less money to fund tax reform without ballooning the fiscal deficit.Naturally the market, which always prices in the worse case scenario, spent the past 24 hours bemoaning the Capitol Hills fallout while questioning the US administration's broader economic policy agenda. This mindset had left the risk compound under pressure but let's not forget that with WTI precipitously tumbling to the key $47.00 per barrel level, it too likely had as much influence over investor's psyche but when the key WTI support level held the markets moved into consolidation mode. Commodity markets closed the session mixed, Gold higher but Iron ore down 4 % The Greenback is weaker against most major counterparts but is slightly above its session lows.While US equity markets finished none the worse for wear with the S&P500 closing down just 0.1% as stock traders while undecided about the significance of the failed health care bill, have certainly not hit the panic button. And correctly so in my view, as it's unlikely we've seen the last of the Obamacare repeal as the Trump administration now realises the importance of getting one's ducks in a row.

Australian Dollar

The Australian dollar continues to feel the overhang of risk aversion but is very wobbly after getting sideswiped by another drop in Iron ore prices overnight. While mainland's deleveraging policy triggered the slide; it appears the markets are finally coming to the reality check that when the port stock rises, it foretells a drop in prices. And with the Trump reflation trade on the ropes, those stockpiles are looking even more ominous in traders eyes. In this light, I think it would be safe to say that the Aussie will continue to underperform its' commodity bloc peers and on a break of the .7600 level we should expect AUD is selling to accelerate.

Euro

The Sturdy PMI surveys and the general improving tone in the EU data continue to underpin the Euro. And with the ECB members making overtones regarding shifting policy, we may be in the early stages of a significant reversal in the Euro fortunes as the fundamentals are starting to turn favourably hard.

Japanese Yen

USDJPY had all but lost its lost topside momentum near term, and it would surprise me if the markets did not go all out into sell-on-rallies exemplar. Mounting headwinds from the national Moritomo scandal, Japanese Year end repatriation flow, US political uncertainty and off course a less hawkish Fed All has the market thinking the lower is the path of least resistance. Mind you much this mindset is driven on the back of discombobulation on Capitol Hill so at any sign of GOP unity can shift this risk-averse mindset quickly.

The long position entered in EUR/JPY at 121.30 the previous week was stopped last week at 120.80, the pair extended recent decline and fall to as low as 119.32 late last week.

We also entered in short position in USD/CAD at 1.3400 last week, however, as the greenback found support at 1.3316 and recovered, we exited the position today at 1.3368 with small profit.

Two long positions were entered in AUD/USD and EUR/GBP last week at 0.7645 and 0.8620 respectively and  the positions are still holding at the moment.

In short, 4 positions were entered last week with total loss of 18 points and the positions are listed below.

17 Mar: EUR/JPY - Long at 121.30, exited at 120.80 (- 50 points)
22 Mar: AUD/USD - Long at 0.7645,
22 Mar: USD/CAD - Short at 1.3400, exited at 1.3368 (+ 32 points)
23 Mar: EUR/GBP - Long at 0.8620,

|                 AUD         EUR/JPY          EUR/GBP         CAD
Jan             - 15             -275                - 35            -120
Feb           + 140            -17                  - 40             +11
Mar            + 20            +115              + 32       
Apr                  
May          
Jun           
Jul            
Aug          
Sep              
Oct           
Nov         
Dec                                                                                                                                               
Y-T-D        + 145           - 177               - 43            + 57

We ventured long in USD/JPY at 112.55 and clearly we underestimated the strength of recent selloff, the position was stopped at 112.20 and dollar tumbled to as low as 110.11 earlier today before recovering.

No position was entered among other currency pairs.

In short, only 1 position was entered among all 4 currency pairs with total loss of 35 points and the position is listed below:

21 Mar : USD/JPY - Long at 112.55, exited at 112.20 (- 35 points)

|                 JPY             EUR             CHF            GBP

Jan          + 167             - 85              - 10            + 50
Feb          + 200            +150             +93            - 59
Mar              -43                -35                  0           - 35
Apr          
May         
Jun          
Jul           
Aug         
Sep             
Oct         
Nov        
Dec                                                                                               
Y-T-D       + 324            + 25                +83           -44     

Gold has edged higher in the Monday session. In North American trade, gold is trading at $1254.84 per ounce. On the release front, there are no economic indicators in the US. We'll hear from two FOMC members – Charles Evans and Robert Kaplan. There are no US indicators until Tuesday, with the release of CB Consumer Confidence.

Donald Trump's stunning ascendancy to the presidency last November triggered an impressive rally by the US dollar. However, market euphoria over Trump's election win is long past. The inquiry into the Trump administration's links with Russia continues to make headlines, and is another cause for concern for nervous investors. Trump has been in office for over two months, but he has yet to provide any details over even an outline of economic policy. Last week, Trump's proposed bill to change Obamacare was not even voted on, as the White House was unable garner enough support to pass the bill. This latest setback for the beleaguered Trump administration could increase market jitters and send the US dollar to lower levels.

Gold prices are sensitive to rate moves, so investors continue to look for clues about what the Federal Reserve has planned for the remainder of 2017. The Fed's rate statement and dot plot indicated that the Fed is looking at another two hikes in 2017, which would make three in total. This forecast was reiterated by Chicago Fed President Charles Evans earlier this week. Although one could make a strong case that three rate hikes in 2017 would be impressive, the markets appear disappointed, and would like four hikes, given the strong performance of the US economy. The Fed's cautious approach has reduced investors' appetite for risk, which has been good news for gold, a safe-haven asset.

West Texas crude has dipped below the $48 level on Monday. In the North American session, WTI crude futures are trading at $47.69. Brent Crude futures are trading at $50.90, as the Brent premium stands at $2.21. On the release front, there are no economic indicators in the US. We'll hear from two FOMC members - Charles Evans and Robert Kaplan. There are no US indicators until Tuesday, with the release of CB Consumer Confidence.

WTI crude has dropped to a low of $47.08 on Monday, close to its lowest level since the end of November. Crude has remained under pressure since last week's Crude Oil Inventories, which posted a strong surplus of 5.0 million barrels, well above expectations. The weekly indicator has recorded only two declines in 2017, as US oil drillers continue to enter the market and ratchet up US oil production. This, together with increased US shale production, has more than offset OPEC's production cuts. Last week, OPEC announced it was considering extending the production cut agreement by another 6 months, until the end of 2017.

Donald Trump's stunning ascendancy to the presidency last November triggered an impressive rally by the US dollar. However, market euphoria over Trump's election win is long past. The inquiry into the Trump administration's links with Russia continues to make headlines, and is another cause for concern for nervous investors. Trump has been in office for over two months, but he has yet to provide any details over even an outline of economic policy. Last week, Trump's proposed bill to change Obamacare was not even voted on, as the White House could not garner enough support to pass the bill. This latest setback for the beleaguered Trump administration could increase market jitters and send the US dollar to lower levels.

GBP/USD has posted gains in the Monday, as the pair has hit 7-week highs. In the North American session, GBP/USD is trading at 1.2570. On the release front, it's a quiet start to the week. There are no UK events on the schedule. In the US, we'll hear from two FOMC members – Charles Evans and Robert Kaplan. There are no US indicators until Tuesday, with the release of CB Consumer Confidence.

Donald Trump's stunning ascendancy to the presidency last November triggered an impressive rally by the US dollar. However, market euphoria over Trump's election win is long past. The inquiry into the Trump administration's links with Russia continues to make headlines, and is another cause for concern for nervous investors. Trump has been in office for over two months, but he has yet to provide any details over even an outline of economic policy. Last week, Trump's proposed bill to change Obamacare was not even voted on, as the White House could not garner enough support to pass the bill. This latest setback for the beleaguered Trump administration has boosted GBP/USD in the Monday session.

In the UK, last week's consumer indicators pointed to stronger spending and inflation. Retail Sales sparkled in February with a gain of 1.4%, its highest gain since October 2016. At the same time, for the three months to February, retail sales suffered their biggest slide since 2010. This points to an erosion in consumer spending due to the weak pound, which has fallen 16 percent since the Brexit vote last June. The weak currency and higher oil prices have also sent inflation higher. CPI climbed 2.3% in February, beating the forecast of 2.1%. This is a significant reading, as it surpassed the BoE's inflation target of 2.0% for the first time in three years. Higher inflation levels have increased speculation that the Bank of England, which has had a neutral stance on rate policy, could raise rates this year. BoE deputy governor Ben Broadbent acknowledged that a rate hike was a possibility in 2017, and the BoE will be under further pressure to make a move if inflation continues to head upwards.

USD/CHF - 0.9833

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9837

Kijun-Sen level                    : 0.9864

Ichimoku cloud top                 : 0.9932

Ichimoku cloud bottom              : 0.9921

Original strategy :

Sell at 0.9910, Target: 0.9800, Stop: 0.9945

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 0.9900, Target: 0.9800, Stop: 0.9935

Position : -

Target :  -

Stop : -

The greenback only recovered to 0.9960 on Friday before meeting renewed selling interest and the subsequent selloff below previous support at 0.9861 adds credence to our bearish view that recent decline is still in progress and may extend weakness to 0.9810-15 (50% projection of 1.01710.9882 measuring from 0.9960), then 0.9795-00, however, loss of downward momentum should prevent sharp fall below 0.9770-75 (100% projection of 1.0171-0.9942 measuring from 1.0003), bring rebound later.

In view of this, would not chase this fall here and we are looking to sell dollar on subsequent rebound as 0.9900-10 should limit upside. Only above said resistance at 0.9960 would abort and signal low is formed, bring retracement of recent decline towards indicated previous resistance at 1.0003.

GBP/USD - 1.2587

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2579

Kijun-Sen level                    : 1.2543

Ichimoku cloud top              : 1.2494

Ichimoku cloud bottom        : 1.2478

Original strategy :

Buy at 1.2490, Target: 1.2600, Stop: 1.2455

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.2490, Target: 1.2600, Stop: 1.2455

Position : -

Target :  -

Stop : -

As cable has eased after rising to 1.2616 in NY morning, adding credence to our bullish view that recent upmove from 1.2109 is still in progress and upside bias remains for this move to extend further gain to 1.2635-40, however, loss of upward momentum should prevent sharp move beyond 1.2670-80 and price should falter below previous resistance at 1.2706, risk from there is seen for a retreat later.

In view of this, would not chase this rise here and would be prudent to buy cable on subsequent retreat. Only below support at 1.2469 (Friday’s low) would abort and signal top is formed, bring retracement of recent upmove towards previous support at 1.2424 which is likely to hold from here.

EUR/USD - 1.0886

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 1.0880

Kijun-Sen level                  : 1.0849

Ichimoku cloud top             : 1.0793

Ichimoku cloud bottom      : 1.0787

Original strategy  :

Buy at 1.0800, Target: 1.0900, Stop: 1.0765

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.0800, Target: 1.0900, Stop: 1.0765

Position : -

Target :  -

Stop : -

The single currency also opened higher today on dollar’s broad-based weakness and the the subsequent rally signals recent upmove is still in progress, hence bullishness remains for further gain to 1.0900 and possibly 1.0930-35 (61.8% Fibonacci retracement of 1.1300-1.0340), however, loss of near term upward momentum should prevent sharp move beyond 1.0955-60 and price should falter below 1.0990-00, risk from there has increased for a retreat to take place later.

In view of this, would not chase this rise here and we are looking to buy euro on subsequent pullback as 1.0800-10 should limit downside. Only below support at 1.0760 would abort and signal top is formed, bring retracement of recent upmove to 1.0730 but 1.0719 support should remain intact.