The Loonie was pressured for most of the week on disappointing news from Canada as well as fears of a global growth slowdown.
Canada Headlines and Economic data
- Canada’s merchandise trade deficit with the world widened from $2.0 billion in November to a record $4.6 billion in December
- Bank of Canada Waters Down Rate Conviction Amid Growth Slowdown
- Bank of Canada Holds Key Rate at 1.75%
- Bank of Canada Sees Longer Economic ‘Detour’ Than Expected
- Value of Canada building permits down 5.5 percent in January
- Canada’s Labor Market Is Off to Its Best Start Since 1981
Major Market Drivers for the Canadian Dollar
The Loonie was a net loser for the week, likely triple whammied by fresh global updates pointing to a global growth slowdown, Canadian economic updates that we’d say were net dovish, and the Bank of Canada shifting a bit more dovish on its outlook on the economy and interest rate hikes.
First, from a global growth and risk sentiment perspective, it seems like the focus was global trade and how it seems the whole system is slowing down rapidly. It started off with very weak manufacturing PMI data in South Korea and services PMI data from China, followed by Canada and the U.S. posting weak trade balance data, with the latter hitting a record $891B deficit in 2018. The trade updates of the week ended with China posting a significant fall in its trade surplus as exports fell more than 20% in February. Altogether, this paints a picture of global weakness going forward and likely why we saw risk assets lean negative. This included the Loonie due to Canada being large supplier of energy, raw materials and agricultural products to the world, and likely hurt if global growth and trade continues to slow down over time.
Focusing specifically on Canada, this week’s economic updates pointed to weakness on the domestic front with Canadian trade balance, business sentiment and housing data all disappointing Loonie bulls. There were arguably bearish reactions to each of these releases, but very short-term in nature, likely due to the Loonie already being under pressure from global risk sentiment.
The one exception the weak economic theme this week was the better-than-expected Canadian jobs data, showing a net increase of 55K jobs, way above the expectation of 1K jobs. It also showed that wages grew for permanent employees by 2.3%, up from 1.8% in January. This did appear to spark a uniform move among Loonie pairs, lifting them higher through the rest of the Friday session.
Finally, our big event for Loonie traders this week was the Bank of Canada monetary policy meeting. The BOC surprised traders with a little bit more dovish rhetoric than expected after dropping the language of needing to raise rates over time from the January meeting. Instead, they mentioned that the economy continues to need stimulus and that there is an “increased uncertainty” on the future of rate increases. Coupled with the much weaker Ivey PMI data (50.6 vs. 54.7 previous) released in the same hour, traders sold Loonie pairs immediately, but it was short-lived.