Summary:

• Canadian GDP for August unexpectedly drops by 0.1% M/M
• Fall comes against forecasts for a 0.1% rise
• USDCAD spikes higher by 70 pips to retest 3-month high

The Canadian economy unexpectedly contracted in the month of August with the GDP M/M coming in at -0.1%. The release is the second consecutive disappointment for this reading with a consensus forecast for a 0.1% rise against a prior print of 0.0%. The Y/Y reading remains strong at 3.5% but again this was below expected with forecasts for a 3.6% increase. 

It should be kept in mind here that the data is 60 days old and therefore is lagging in nature. Given the strong rise we’ve seen in Oil prices in the last 2 months there could be some suggestion that the future economic data will be better than today’s release, with Brent Oil hitting its highest level since July 2015 just this week. In August Brent traded approximately between $50-53 and is therefore now substantially higher. 

 There has been a strong correlation between the Canadian GDP reading and the level of Oil extraction. Source: XTB Macrobond

 

 The market reaction has seen a swift move lower in the Canadian dollar, with the USDCAD pair surging around 70 pips to pop back above the 1.29 handle.

The high of 1.2914 coincides almost exactly with last week’s peak seen on Friday. This level could now be seen as important resistance with an inverted hammer printed last Friday. Should price fail to break above this level then there could be some weakness ahead with fib retracements offering possible targets for shorts. Alternatively, a break above 1.2914 would open up the possibility of a further extension to the upside and could see the big 1.30 level reached in the not too distant future. 

 The USDCAD has retested the 3-month high at 1.2914 made last Friday following the release. This could be a key level to watch going forward. Source: xStation