Canada's GDP expanded 0.7% in the fourth quarter of last year

Colin Cieszynski, Senior Market Analyst at CMC Markets, on Canada’s economy and Canadian Dollar

Canada’s GDP expanded 0.7% in the fourth quarter of last year and in overall its economy grew slightly. Do you expect that in the future we will see approximately the same growth levels or it could head to the south?

In my opinion, there is a possibility that Canada’s GDP could weaken in the first quarter of this year as it has been a difficult winter in many parts of the country and we did have few significant storms. The Canadian economy was not impacted quite as much by cold weather conditions as the U.S. economy; however, there still could be a risk for short term numbers. Over the longer term Canada’s economic growth should be supported with the global economy’s continuous recovery and with the resource demand growing. Besides, it is common that Canada tends to lag a little bit behind the U.S.

Pacific Investment Management Co. forecasted that Canadian home prices will fall by 20% in the next five years; however, they say that it is a correction not a collapse. What is your outlook on the Canadian housing market and do you think that it is overvalued at the moment?

At the moment the Canadian housing market is extremely strong and it has remained strong despite all the forecasts issued over the last several years that are calling for the collapse in Canada’s housing market. At some point the market is likely to cool, because its growth in prices has definitely outpaced the growth in income, thus certainly at some point it is due for a correction. It is hard to forecast when that might happen, because one of the aspects that are underpinning the Canadian housing market is continuous strong immigration from both - within and outside of Canada into major cities that helps to support the housing market.

What are your thoughts on the recent Canadian unemployment data and how it will determine Canada’s currency?

On the surface, the Canadian jobs decline of 7,000 positions last month appears very disappointing, and the loonie fell nearly 1% as a result. Looking deeper, the figures were not as bad as the headline number would suggest as full time jobs increased by 18,000 while part-time jobs fell by 25,000. Canada also reported a $0.2 billion trade deficit last month, which was an improvement from the $1.2 deficit the month before.

These numbers, combined with the recent strong Canadian PMI report suggest that the economy continues to improve, and the loonie could rebound once the initial knee-jerk reaction runs its course. The Canadian Dollar remains sensitive to swings in the U.S. counterpart, which knocked down gold and most major paper currencies on Friday.

What do you see as the main drivers for the Canadian Dollar?

There are several main drivers for the Canadian Dollar. Over the long term it is the relationship with the U.S., and for most of the last several years Canada’s Dollar has outperformed the U.S. Dollar just as the Canadian economy has outperformed the U.S. economy. At the moment the U.S. economy is rebounding and the Fed is moving more towards tapering its bond-buying programme and eventually towards normalizing its monetary policy. As a result, we are seeing the U.S. Dollar catching up to the Canadian Dollar and we have seen the loonie weaken as primarily as a function of the U.S. Dollar recovery.

The second major driver for the Canadian Dollar is the crude oil price as it has had its ups and downs and tends to impact trading in Canada as well. Also, last week we had a number of major economic data releases that drove the Canadian Dollar. For example, on Thursday Canadian PMI came in much higher than expected, which gave the loonie a boost.

What are your short and longer term forecasts for USD/CAD and EUR/CAD?

USD/CAD had a significant rally between the end of September and the end of January; however, there are some signs that it might be topping for now. We saw a double top near 1.12 and while the pair rallied recently, it peaked at another lower high and remains in a $1.09 to $1.12 trading range. Momentum indicators have also suggested that some of the upward momentum in USD/CAD is weakening and it could test the low end of that range again. Its 50-day moving average is currently just under $1.1000.

EUR/CAD has been in a steady uptrend since April of 2013, consistently working its way higher. Recently the pair has been sending mixed signals. Last week, it broke out of a 1.50-1.54 trading channel to its highest level in nearly four years on a combination of the Canadian Dollar’s weakness and a strengthening Euro. On the other hand a negative divergence in the RSI suggests upward momentum has been weakening. Currently near 1.54, it is possible the pair could test both 1.50 and 1.60 at different points in the coming year.