Forex Investment and Currency Trading

Canadian Trade, US Demand and the Ambassador Bridge

Canadian GDP shrank 0.2% (cons: +0.2%) in February dispelling confidence that the economy was emerging unscathed from the US slowdown. The conduit for the US downturn to the Canadian economy is real exports, which reflects activity rather than surging commodity prices. A more impressive representation of the link between Canadian trade and US demand is the Ambassador Bridge linking Windsor, Ontario with Detroit, Michigan. More than one-quarter of the merchandise trade between Canada and the US crosses the bridge, energy products are a notable exception. Exports have been and will be a constant challenge for the BoC, as confirmed by BoC Governor Carney while testifying on Parliament Hill this week.

Canada’s Consumption Decoupling Has Peaked

The BoC is poised to ease further to ensure the resiliency of domestic demand in Canada and to cushion the struggles of real exports. The BoC has reason for concern. Canadian consumption
growth was an impressive 5.4%y/y in Q4. This was far above the pace of US consumption growth at 2.6%. The gap is likely to widen in Q1, where US consumption growth was reported at 1.9%. Market expects Canadian consumption growth to remain at 5.4%. However, after that, Canadian spending begins a rather rapid descent, dipping below 3%y/y by year end. This would still be quite healthy, but would also be the slowest pace of expansion since 2003. Exports are a pressing concern for the BoC now; domestic issues lurk in the background. CAD will soon notice.

10-Year CAN-U.S. Yield Spread Breaks Key Support

USD/CAD bottomed in Q4 2007 just as the 10-year yield spread between Canadian and U.S. interest rates was forming a peak. The spread topped out in Q1 2008 and later registered a bearish trend reversal below 0.08 bps. This confirmed the commencement of a retracement phase in the spread, with initial support at -25bps serving as a target, followed by 61.8% Fibonacci retracement of the Q2 2006-Q1 2008 advance at -0.35bps. A further erosion in the yield spread would have bullish implications for USD/CAD – with a daily close above nearby resistance at 1.0193 projecting additional gains toward the top end of the recent trading range at 1.0343. Therefore, keep an eye on this relationship in the weeks ahead.