- Central banks remain “front and centre”
- Loonie penalized by crude prices
- 25% fall in oil prices adds +0.3% to U.S GDP
- Demons of deflation persist
Friday’s surprising +2.8% annualized Canadian gross domestic product (GDP) gain in the third quarter is unlikely to persuade Governor Stephen Poloz at the Bank of Canada (BoC) to change course anytime soon. Canada’s is a commodity-rich and sensitive economy. With oil representing about +20% of Canadian exports, the recent slide in energy prices is weighing on Canada’s terms of trade. The big driver for growth in the third quarter was net exports, which added +0.9% to Canada’s overall growth.
Over the past few months, plummeting energy prices are having a “net” negative impact on the economy north of the U.S. border and its currency, the “loonie.” The CAD ($1.1410) is trading lower, despite Friday’s better-than-expected GDP report in this holiday shortened trading week. Immediately after the release, the CAD did find some outright traction. Nevertheless, the weight of crude prices is having a much greater negative impact, supported obviously by OPEC’s (Organization of the Petroleum Exporting Countries) decision to not cut its production target. On Thursday, OPEC oil ministers maintained the existing daily production of +30M bpd quota.
Loonie to End Its Bull Cycle
Technical analysts believe that a USD/CAD daily close north of Thursday evening’s $1.1324 print sends a strong signal to the market that the loonie’s recent bullish run has come to an end. The trend reversal will now target this year’s USD/CAD high ($1.1465). Despite the energy sector’s growing importance to the U.S. economy, many believe that the recent drop in crude prices will be a net gain for American economic growth. With crude prices falling -25% in recent months, it equates to approximately -$75 billion in tax cuts for the U.S. consumer, or it adds +0.3% to U.S. GDP in the coming year. Regardless, the market will be required to follow U.S. yields to gauge the big dollar’s overall strength. The demons of deflation in Europe and Japan will not be powering global yields higher anytime soon.
What to Expect Next Week
Be ready to hit the ground running next week. The bulk of the market’s attention will again be on central bank decisions and reactions. It all starts with the Swiss National Bank on Sunday. No matter which way the gold referendum vote goes, investors will want to cash in on some of their longstanding positions. Meanwhile, the Reserve Bank of Australia’s rate decision will kickstart Australasia’s week. The Bank of England, European Central Bank, and BoC will all make public statements in middle of the week before giving way to the granddaddy of economic indicators: the U.S. nonfarm payrolls report on Friday.