Canadian GDP Preview: A third consecutive beat or signs of a trade-related slowdown - 3 scenarios

• Canada's monthly GDP is expected to remain flat in April after robust growth earlier.
• An outright contraction cannot be ruled out amid growing trade tensions.
• The Canadian Dollar is looking for a direction amid rising oil prices.

Canada publishes its Gross Domestic Product for April on Friday, June 29th, at 12:30 GMT. The nation is unique in releasing GDP data on a monthly basis. The publications that conclude a quarter, like the one released last time, tend to have a broader impact.

Nevertheless, the upcoming announcement is the first look into the second quarter. The Bank of Canada expects the economy to pick up in the Spring after a slowdown in the winter. However, the consensus of economists is cautious, at least on the first month of the quarter. Projections stand at 0% growth and this leaves room for a third consecutive beat. Back in March, the economy grew by 0.3% MoM, above 0.2% expected. In February, a growth rate of 0.4% was recorded, above 0.3% forecast.

Here are three scenarios for the event:

1) Contraction on trade - CAD falls

Nevertheless, the Canadian economy is confronting a high level of uncertainty on trade. NAFTA talks have stalled on disagreement and as the results of the Mexican Presidential Elections, held on July 1st, are awaited. The Trump Administration has already imposed tariffs on steel and aluminum, a move that has angered Canada. The spat between Canadian Prime Minister Justin Trudeau and US President Donald Trump was not helpful, to say the least. 

The relations were better back in April, but uncertainty about NAFTA and tariffs were already there. They may have caused some changes in behavior such as postponing business decisions.

A negative growth rate, or contraction, cannot be ruled out. It would paint a darker picture of the Canadian economy in a quarter that was supposed to show a rebound. A recession, technically defined as two consecutive quarters of negative growth, is probably far off. However, the Bank of Canada may re-think its plans to raise rates in the upcoming meeting in July. 

In this scenario, the Canadian Dollar will likely stumble down.

2) A third consecutive beat

With expectations at 0%, the bar is low and positive growth during April is also an option. BOC Governor Stephen Poloz and his team will be reinforced in their hawkish stance and the odds of a rate hike would rise.

Such a move would lift the Canadian Dollar. 

3) As expected, no change

An as-expected result would trigger less volatility. However, in absolute terms, no growth is not good news. As mentioned earlier, the BOC expects growth to pick up in Q2 and 0% is not a good start to the quarter. 

So, the C$ could struggle. Nevertheless, the reaction in the outcome of "as expected" also depends on the mood in the market.

Canadian Dollar positioning

The loonie is torn between mounting pressure from trade relations to rising oil prices, a key export in Canada. The prices of the black gold have been on the rise as inventories showed a drawdown, OPEC has not opened the floodgates, and Trump's decision to try to ban Iran from exporting oil to other countries. 

The increase in prices stabilized the loonie after long days of declines, and it is more balanced now. Nevertheless, oil prices can support and fall, while Trump's trade wars seem here to stay. All in all, the Canadian Dollar remains on the back foot.

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