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Canadian GDP May Sink The Loonie?

Fri, Aug 29 2008, 06:38 GMT
by Daily FX Research Team

DailyFX

Canadian GDP is expected to have grown 0.6% in the second quarter after contracting 0.3% the quarter prior . Economists are forecasting the natural resource rich economy grew 0.1% in June as oil prices were setting record levels.

How To Trade This Event Risk

Canadian GDP is expected to have grown 0.6% in the second quarter after contracting 0.3% the quarter prior . Economists are forecasting the natural resource rich economy grew 0.1% in June as oil prices were setting record levels. However, the U.S. downturn impact on exports has seen the labor market weaken as the commodity boom comes to an end. The economy gave back 55,200 jobs in July following a loss of 5,000 the month prior. Although, their have been signs of resiliency with the Ivey PMI reading beating expectations in July and the merchandise trade balance improving to C$5..8 billion from C$5.2 the month prior. Although the BoC was hawkish following its last rate decision, expectations are that they will leave their benchmark rate in hold as easing oil prices have reduced price pressures. Indeed, consumer prices slowed to 0.3% from 0.7% the month prior allowing the central bank to resume their focus on downside risks. Therefore, a weaker than expected growth number will decrease interest rate expectations.

Oil prices were at elevated levels during the second quarter and may have spurred greater growth than expected. Considering that the Canadian Dollar has retraced to Fibo support a significant improvement in growth may be needed for greater upside potential. When looking for a long Canadian dollar position (short USDCAD), we will look for data that suggests the economy is immune to a U.S slowdown and the BoC can consider a rate hike. Therefore we would look for rebound in growth of more than 1.0% for a loonie long position. If we have this bullish fundamental mix, we will look for a red, five-minute candle to confirm entry on two lots of USDCAD at market. Our stop will be placed at the nearby swing low (or reasonable distance considering the level of surprise) and the first lot’s target will be immediately set equal to this initial risk. The second target will be determined by discretion. To preserve profit, we will move the stop on the second lot to breakeven when the first takes profit.

Alternatively, a second month of contraction would technically show that the Canadian economy is in a recession. For a short we will look for a growth to remain flat and follow the same setup as the short, just in reverse.

Published on  Fri, Aug 29 2008, 06:43 GMT