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Slowing US Economy a Warning to Canada

This has not been a good week for those hoping to see confirmation of an improving U.S. economy. If anything, evidence suggests the pace of growth is waning [1] and April’s consumer spending numbers were particularly disappointing. Total purchases for the first quarter of the year were far behind those recorded during the final quarter of 2010. For the quarter, consumer spending rose by less than half a percent despite the sharp increase in energy and food prices.

Even more alarming than the faltering consumer spending is the employment outlook. Last week’s new unemployment claims were much higher than anticipated totaling 424,000 new benefits claims. There is little optimism that we will see an improvement in unemployment which, for several weeks now, has remained stubbornly stuck at nine percent.

U.S. officials are rightly concerned with these latest results and any talk of a return to higher interest rates before the end of the year has been silenced. But it is not only the Federal Reserve that should be concerned – alarm bells should also be ringing north of the border in the halls of the Bank of Canada as well.

Many years ago a Canadian Prime Minister described living next to the United States as akin to sleeping with an elephant – every twitch and move made by the elephant, intentional or not, was felt by the bedmate. The truth of the matter is that Canada and the United States are linked not just by their geography, but also by economic activity. Each year the U.S. buys roughly seventy percent of Canada’s total exports comprised largely of machinery and energy; likewise, the U.S. is responsible for some sixty percent of the imports shipped into Canada. For Canadian exporters and consumers, that makes America one important elephant.

Currency traders are fully aware of the impact the U.S. can have on the Canadian economy and the Canadian dollar. The Canadian buck – known as the “loonie” for the waterfowl depicted on the back of the one dollar coin – has been unable to maintain the torrid pace it was on earlier this year. The pullback in commodity prices has also contributed to downward pressure on the loonie which has declined more than three percent alone during the month of May.

Also hampering the loonie is a growing fear that demand for resources is on the decline in China. Inflation continues to push prices higher in the world’s second largest economy with consumer prices gaining more than five percent in the past year while food costs are up more than eleven percent. This has analysts predicting additional interest rate hikes and possible decline in the Chinese economy.

With two of Canada’s most important export markets possibly weakening in the coming months, there is little chance that Canada can avoid suffering a hit as well. This possibility has forced currency trades to push back the prospect of a rate hike in Canada by several months. Gross Domestic Product numbers are due on Monday and this will provide an up-to-date snapshot of the state of
Canada’s economy. The Bank of Canada is also scheduled to issue an interest rate statement early next week and you can bet traders will be looking for signs pointing to the Bank’s intent and expectations for the economy.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Scott Boyd

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