Article by ForexTime
The Canadian dollar gained traction against the greenback slicing through trend line support and pushing through the 10-day moving average. With Canadian GDP expected to climb to a rate slightly above the Bank of Canada’s forecast, the yield differential should eventual move in favor of the Loonie.
Canadian GDP is expected to expand at a 2.8% clip in Q2 after the anemic 1.2% Q1 gain. This would put Q2 GDP above the BoC’s 2.5% GDP estimate. The details should be in-line with the Bank’s outlook, as growth improves amid a return to normal weather following the harsh winter. Hence, the report will be consistent with retention of dovish guidance and a neutral policy outlook next week.
The monthly trade report revealed that export volumes rose 20% in Q2 while import volumes expanded 12.0% in Q2. Net exports should make a positive contribution to Q2 GDP. Net exports added 1.6% to GDP in Q1, but only because the 2.4% decline in exports undershot the 7.2% pullback in imports.
As for the BoC, a 2.8% Q2 growth pace would be above their 2.5% estimate. While the pace will be enough to consume some spare capacity, there will still be ample unused capacity in place. Hence, the report will not alter the outlook for an extended period of steady policy.
Of course, the details make up a key part of the report’s interpretation for the BoC’s policy outlook. The surprisingly rapid pick-up in export growth during Q2 appeared to challenge the Bank more cautious growth outlook. Governor Poloz threw cold water on that notion. Speaking in comments last Friday after the Fed’s Jackson Hole conference, he was cautious on the recent good news for exports, noting that it was too soon to say if it was a trend. Meanwhile, he highlighted still weak trend employment. He noted there is still room for the labor market to grow given that rates are at 1%, and the Bank figures it has time to watch this unfold.
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The USD/CAD sliced through trend line support, which connected the lows in July to the lows in August and came in near 1.0940. Momentum on the currency pair has turned negative with the MACD (moving average convergence divergence) index generating a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread.
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