Summary:

• Canadian GDP grew much faster than expected in the past month
• USDCAD has fallen back under the 1.25 handle and not far form key support at 1.2415
• Despite strong economic performance however, inflation remains subdued

A 0.6% increase month-on-month for Canadian GDP marks the joint-fastest pace of growth seen this year and has supported the recent rise seen in the Canadian dollar. With expectations for a moderate 0.2% rise inline with the prior reading, today’s number is a clear positive surprise and the year-on-year reading is now an impressive 4.6%.

The news will be a pleasing development for Canadians as the sharp increase in economic growth seen since the end of 2015 hasn’t been reciprocated in prices. The CPI reading has remained in a fairly narrow range between 1% and 2% and in recent months this has in fact declined. What this means is that in real terms Canadians are enjoying a significant rise in wealth. 

From the perspective of the markets the recent rate hike from the Bank of Canada was something of a surprise and if inflation continues to reside not far above the 1% level then there could be a goldilocks situation developing where the central bank need not tighten policy and slowdown growth. 

 

 There has been a large increase in GDP growth of late in Canada, but this hasn’t been matched with a significant rise in inflation.

With the simultaneous release of the Canadian and US GDP there has been a sharp move in the USDCAD pair, with the cross falling back below the 1.25 handle. The market has been trending lower for quite some time now but yesterday there was some early signs of a possible recovery as a bullish engulfing candlestick formed on a D1 chart. The low of 1.2415 now becomes a potentially key level with a break below there negating the positive day yesterday and paving the way for further declines. If this low can hold however then fib retracements of the total decline could offer levels to watch out for with the 23.6% at 1.2739 and the 38.2% at 1.2929.

 Yesterday saw a bullish engulfing candlestick in USDCAD. The market has dropped around 70 pips since the GDP release but If the low of 1.2415 can hold then a recovery is possible.