USD/CAD – Loonie Lower After Disappointing Q1 GDP

Canadian monthly gross domestic product (GDP) was lower than expected on Tuesday. The Canadian economy shrank by 0.2 percent in March. The first quarter growth reached 2.5 percent at an annualized rate. The economy started losing momentum after a strong start in January as even the turn around in crude prices did not do enough to avoid a contraction in the last month of the quarter. Exports showed a massive improvement thanks to a weaker currency with a 1.7 percent growth in the first quarter. The outlook going forward is not optimistic given the impact of the Alberta wild fires has not been fully realized. The Bank of Canada (BoC) was confident that even though the second quarter will see a marked slowdown, the economy will bounce the third quarter. A Fed rate hike would relieve some pressure from the Canadian central bank, and if the fiscal stimulus fails to boost growth, the analysts have not ruled out a rate cut before the end of the year if there are no positive macro changes.

Oil prices has been stable ever since Saudi Arabia and Russia have tried, albeit unsuccessfully to get other producers to sign a oil output agreement. Supply disruptions in Canada, Nigeria, France and Libya have kept the price near $50 per barrel even as other producers reach record high levels of output.

Consumer confidence in the U.S. stumbled with 92.6 reading and raised doubts about the Fed interest rate hike in June if the leading indicator of consumer spending turns out to be on the mark. This week is specially important as there will be plenty of fundamental data to guide the Fed in making their decision on Wednesday, June 15. This week is a jobs week alongside manufacturing and non-manufacturing PMIs. Next week will bring less data points to the table. Consumer confidence has started the short week for the USD on the wrong foot, but there is plenty of indicators to turn that trend around if the economy shows positive signs of sustained recovery.

The USD/CAD has gained 0.623 percent in the last 24 hours. The pair is trading at 1.3132 after trading flat during Memorial day. The USD has been mixed against majors after a weaker consumer confidence, but the CAD took a bigger hit from a lower GDP in the first quarter of 2016.

Oil has been volatile as oversupply concerns surged following new record production levels despite disruptions in Canada, Nigeria and Libya. The Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna this week will bring some clarity on how far apart the group’s biggest producers on presenting a untied front. Iran and Saudi Arabia have broken diplomatic relationships earlier this year following the execution of a cleric and their dispute has all but made the oil output deal impossible at Saudi Arabia’s insistence its an all-or-nothing. Iran wishes to reclaim their pre-sanction levels of production before agreeing to such a deal as other producers have ramped up production and taken market share. The newly appointed Saudi Oil Minister will make his OPEC debut this week and in a sign that he is taking things seriously he was one of the first to arrive in Europe to meet with his fellow producers.

The Canadian dollar continues to face an uphill battle this week with two major economic releases not promising a clear improvement on the economy. The GDP number out of the way, the market will turn to the trade balance to be published on Friday. As always the spotlight will be taken by the release of the U.S. employment data at the same time, with all eyes on signs of wage growth as positive inflationary pressures and a strong employment number on the same release have been elusive, and could sign off the fate of the June interest rate hike.

CAD events to watch this week:

Wednesday, Jun 1
10:00am USD ISM Manufacturing PMI

Thursday, Jun 2
All Day ALL OPEC Meetings
7:45am EUR Minimum Bid Rate
8:15am USD ADP Non-Farm Employment Change
9:30pm EUR ECB Press Conference
9:30pm USD Unemployment Claims
11:00am USD Crude Oil Inventories
Friday, Jun 3
8:30am CAD Trade Balance
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate
10:00am USD ISM Non-Manufacturing PMI

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza