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USD/CAD: Trading the Canada Gross Domestic Product (GDP) Report

Mon, Mar 2 2009, 06:01 GMT
by Daily FX Research Team

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The Canadian dollar is likely to face increased selling pressure over the following week as economists forecast the GDP reading to show a 3.2% contraction in the fourth quarter. Economic activity in the world’s eighth largest economy has weakened considerably throughout the second half of 2008 as a result of the downturn in the global economy, and the outlook for future growth remains bleak as trade conditions deteriorate at a record pace.

Trading the News: Canada Quarterly Gross Domestic Product (Annualized)

What’s Expected

Time of release: 03/02/2009 13:30 GMT, 08:30 EST

Primary Pair Impact : USDCAD

Expected: -3.2%

Previous: 1.3%

Impact the Canada GDP has had on USDCAD over the last 2 quarters

3Q 2008 Canada Gross Domestic Product

he Canadian economy grew 1.3% in the third quarter, which beat expectations for a 1.1% rise in GDP as firms raised outputs for the first time in the last five-quarters amid the slowdown in the global economy. The report showed that private spending weakened for the third consecutive quarter as demands rose 0.2%, which is the lowest level since 2003, while exports slipped another 1.4%, which was followed by a 1.6% drop in imports. Despite the enhanced growth reading for the world’s eighth larges economy, the Bank of Canada expects the annual rate of growth to slip to 0.3% in 2009, which would be the lowest level since the last recession in 1992, the central bank is likely to ease policy further in an effort to stimulate the economy. Nevertheless, as the U.S., Canada’s biggest trading partner, teeters on the brink of a recession, the outlook for future growth remains bleak as trade conditions falter.

2Q 2008 Canada Gross Domestic Product

The GDP reading for Canada showed that the economy grew at an annualized pace of 0.3% in the second quarter, which was well below expectations for a reading of 0.6%, and the outlook for growth is likely to weaken further in the months ahead as trade conditions deteriorate. The breakdown of the report showed that government spending increased to 1.3% from 0.6% in the first quarter, while household spending weakened for the third consecutive quarter to reach an annualized pace of 0.6%. Furthermore, exports plunged 1.5% from the previous quarter, while imports rose 0.6% during the previous three-months. As growth prospects deteriorate at a rapid pace, the BoC is widely expected to lower the benchmark interest in September, and may continue to ease policy further over the coming months as the central bank maintains their dual mandate to ensure price stability while fostering economic growth.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the CAD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on USDCAD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the CAD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on USDCAD ahead of the data release.

How To Trade This Event Risk

The Canadian dollar is likely to face increased selling pressure over the following week as economists forecast the GDP reading to show a 3.2% contraction in the fourth quarter. Economic activity in the world’s eighth largest economy has weakened considerably throughout the second half of 2008 as a result of the downturn in the global economy, and the outlook for future growth remains bleak as trade conditions deteriorate at a record pace. A report by Statistics Canada showed that the nation posted its first trade deficit since 1976 as exports plunged 9.7% in December, which was the biggest drop since 1982, and firms are likely to slash production and employment this year as the International Monetary Fund forecasts a global recession for 2009. Meanwhile, a preceding report by the group showed that the economy lost 129.0K jobs in January, which was the largest drop in employment since comparable records began in 1976, and raised the annual rate of unemployment to a four-year high of 7.2% from 6.6% in December. Moreover, private-sector spending in the region fell 5.4% from November, marking its biggest contraction since 1991, and as households face a weakening labor market paired with financial uncertainties, fading demands from home and abroad are likely to drag on growth going forward. Accordingly, the Bank of Canada is widely expected to lower the benchmark interest rate by another 25bp to 0.75% next week, which would be the lowest level since 1958, as the economy heads into its first recession in over a decade, and the central bank may adopt unconventional measures such as quantitative easing to manage monetary policy going forward as borrowing costs get pushed closer to zero. Nevertheless, as risk trends continue to dictate price action in the currency market, safe-haven flows paired with expectations for further easing by the BoC is likely to weigh on the exchange rate over the near-term, and the reserve currency is likely to strengthen against the commodity bloc as investors remain risk adverse.

Expectations for a 3.2% contraction in GDP favors a bearish outlook for the Canadian dollar however, an enhanced growth reading would certainly set the state for a long loonie trade for the given event risk. Therefore, if GDP falls 2.9% or less, we will look for a red, five-minute candle following the release to confirm a sell entry on two lots of USDCAD, and once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
Conversely, deteriorating fundamentals paired with the downturn in global trade favors a dour outlook for the economy, and a dismal growth reading for the fourth quarter would certainly warrant a bearish outlook for the Canadian currency. As a result, a GDP reading of -3.2% or lower would lead us to short the loonie, and we will follow the same setup for a long USDCAD trade as the short position listed above, just in reverse.

Conversely, deteriorating fundamentals paired with the downturn in global trade favors a dour outlook for the economy, and a dismal growth reading for the fourth quarter would certainly warrant a bearish outlook for the Canadian currency. As a result, a GDP reading of -3.2% or lower would lead us to short the loonie, and we will follow the same setup for a long USDCAD trade as the short position listed above, just in reverse.

Published on  Mon, Mar 2 2009, 07:02 GMT

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