Published: June 4th, 2021
The Canadian dollar kept on punching its weight this week as GBP/CAD slipped into the bottom half of a month-long range, and analysts predicted more gains in the coming days as the loonie gets an expected boost from GDP and jobs data.
The loonie’s strength against other major currencies has happened alongside rallies of 2 per cent or more in some oil benchmarks, an essential signal for commodity currencies.
Oil’s recent upturn has seen ICE Brent crude futures move up 36.5 per cent and West Texas Intermediate futures go up 40.51 per cent. Those moves have been mirrored by increases in agricultural commodities and the majority of industrial raw materials trading on London’s Metal Exchange.
Gains in oil and equities markets support the Canadian dollar and create downside risk for pairs like GBP/CAD and potentially for USD/CAD as well. That’s all good news for loonie bulls.
‘The Canadian dollar has been the top-performing currency of 2021 so far, said BMO Capital Markets FX Strategy Unit in a note to investors. ‘We see the recovery in oil as the primary driver. If that continues, it will push Canada into current account surplus against other trading partners, something we last saw happen in 2008.’
FX Strategists at Scotiabank in Toronto have been more measured in their assessment. ‘Trend signals for CAD are flatter across medium and long-term timescales. That could, however, leave the door open for opportunistic gains in the near term.
While opinion differs somewhat on the size of the CAD opportunity this week, there does seem to be consensus on the vital role Canadian economic data will play in determining forex trading outcomes in the coming days.
Canada’s March GDP numbers will be released a few hours before Ottawa also unveils May employment data. There will also be American non-farm payrolls data to assess in the same period. All of these figures could impact the loonie’s exchange rate against other majors, with any disappointments or surprises potentially leading to a correction.
Analysts at CIBC Capital Markets in Vancouver told Bloomberg that ‘strong first-quarter GDP results wouldn't be the real story this week, as they are highly unlikely to deviate from the rosy forecasts we’ve seen so far. The next quarter could bring softer news, so we’re keeping a close eye on the flash estimate for GDP in April’.
There’s speculation that April’s figures could post a decline in growth after a slight dip in employment levels. Consensus suggests a decline of 23,000 jobs or more in May, which would move Canada’s jobless rate from 7.9 per cent to 8.1 per cent. The reduction will be down to extended lockdowns as much of the country, Ontario in particular, was forced to stay put thanks to COVID-related restrictions. The resulting action may leave the Canadian dollar exposed to any up- or down-side surprises.
In the wake of an economic downturn, most central banks aim to return to full employment before raising interest rates. May’s data could provide insight into the scale of the labour market step back and show the true extent of the challenge ahead for Bank of Canada policy decisions.
Incomes and expenditures related to employment are the bedrock of GDP. Economists see reducing any slack in employment levels as having a direct impact on the level and speed of inflation increases.
Ultimately, it’s inflation that central bankers look to control when decisions are being made about interest rates and the use of monetary policy tactics such as quantitative easing.
Looking to the long-term view, the Bank of Canada has said that, as the Canadian economy absorbs any slack in employment, inflation could return to the 2 per cent mark for a sustained period, likely in the second half of 2022. That could mean BoC is willing, and potentially even planning, to lift interest rates next year.
A few weeks ago, analysts said the loonie was ripe for a correction, citing concerns about a downturn in commodity exports and overheated speculation in forex markets.
The calls for caution came as the Canadian dollar kept defending its place as the best performing major currency of 2021. It saw gains as commodity prices ticked upward and the economy displayed signs of bounce-back from the COVID-19 crisis. With most of Canada’s exports going to America, the stimulus-fuelled boom south of the border almost certainly played a part.
Forex strategists at Barclays, however, sustained their bullish stance. While the loonie might suffer some near-term headwinds, they said that ‘the Bank of Canada (BoC) would continue to play a supportive role,’ citing the BoC’s decision to scale back its quantitative easing programme at the end of April.
When central bankers tighten monetary policy, either by reducing quantitative easing or raising rates, while other central banks stay in support mode, the currency issued by the first central bank often appreciates against the others.
In a weekly foreign exchange research briefing in early May, Barclay's FX unit said that 'the loonie should still be supported in the medium term. As Canada’s economic outlook stays positive and hasn’t been knocked much off-course by the third COVID wave, we remain positive as well.’
Supporting their bullish stance was the accelerating rollout of the country’s vaccination programme, following a surge in supply and increasing participation rates that saw it move past the US in inoculation rates.
‘The percentage of Canadians who have had at least the first vaccine dose is rising even while the number of new cases is starting to drop off. Global growth against a backdrop of positive risk sentiment is being bolstered by the Fed’s dovish stance. All of this points to more strength for the loonie against sterling and the dollar’.