A recent analysis from Brown Brothers Harriman (BBH) strategist Elias Haddad reveals that the Canadian Dollar (CAD) has been lagging behind other major currencies. This underperformance comes in the wake of declining oil prices and an unexpected technical recession that has dampened economic sentiment.
In the first quarter, Canada’s Gross Domestic Product (GDP) contracted at an annualized rate of -0.1%, significantly lower than both consensus expectations and the Bank of Canada’s projection of 1.5%. Additionally, the contraction in the previous quarter was revised downward, marking a more profound economic slowdown than initially thought, with Q4 GDP now showing a decline of 1.0%. Haddad noted that while the contraction in GDP might be somewhat inflated by a spike in gold imports, the substantial positive inventory contribution (+1.1 percentage points) indicates that the underlying economic growth remains weak.
Heading into the labor market data set to release on Friday, economists anticipate that Canada may add about 10,000 jobs in May, a rebound from April’s job loss of 17,500. The unemployment rate is projected to hold steady at 6.9% for the second consecutive month. However, signs of increasing slack in the labor market are evident, with average employment decreasing by 29,000 jobs over the three months leading to April. Concurrently, key measures of core inflation are either meeting or falling below the Bank of Canada’s target rate of 2%.
In light of these economic conditions, Haddad suggests that the current expectations for Bank of Canada interest rate hikes—projected at 50 basis points over the next 12 months—may be overly aggressive. As the market adjusts its rate expectations downward, there’s a potential for the USD/CAD exchange rate to rise towards resistance at 1.3930, which represents the January high.
This unfolding scenario reflects the challenges faced by the Canadian economy and the implications for currency markets, warranting close observation as new economic data emerges.
