CAD Under Pressure with GDP Report Out

Posted by James Hughes -

The Canadian Dollar (CAD) was the best performing major currency last week. This is due to better than expected economic data and rising oil prices. Still, it has faced downside risks this week given the international spread of coronavirus and its impact on oil prices.

Last week, Canada’s Dollar got support from rising oil prices and resilient bond yields. However, hose two tailwinds could turn to headwinds from the open on Sunday. It could be that markets respond to the latest adverse coronavirus headlines. The latter could include more deaths and a spread into other parts of Europe.

What happened to CAD?

The outbreak severely hit international supply chains when it was only in China. Since it has escaped into the wider world, with deaths confirmed in Italy, the impact could grow larger. It could also dent expectations for global growth and asset price performance.

This, in turn, would not be positive for the Loonie given that oil is Canada’s largest export and prices would plummet with expectations for global demand. These adverse effects could turn negative by losses for stock markets, which the Loonie is also positively correlated with. If a global downturn does begin to develop, the Bank of Canada (BoC) may then be more likely to cut its cash rate and undermine the support of oil and stocks for the Loonie.

December’s GDP number is due for release on Friday. IT will reveal to markets whether the economy continued to underperform the BoC’s forecasts into year-end. This is important because the bank put markets on notice at the last meeting. A potential rate cut could follow any signs that the economy does not meet the forecasts. Markets are looking for December GDP growth of 0.1% and a quarterly expansion of 0.3%, similar to the BoC.

The Loonie might not be ready for a rate cut any time soon. Pricing in the overnight-index-swap market-implied on Friday, an April 15 cash rate of 1.63%, which suggests investors see the odds of a rate cut at the April meeting as being very much 50/50. This poses both upside and downside risks for the Canadian Dollar over the next few months.

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