Forex Investment and Currency Trading

As indicated by the February GDP report, Canada’s 1Q growth will be lower than the 1% annualized expected by the BoC in its monetary policy report, perhaps even lower than annualized US growth of 0.6%. But market thinks that special factors have played a large role in the poor 1Q.

Canadian GDP unexpectedly fell 0.2% in February, putting at risk the BoC estimate that GDP rose at an annual pace of 1% in 1Q 2008 (we will have to wait until the end of May for the March and 1Q data). The negative surprise in the monthly GDP arises because it showed a drop in manufacturing output whereas the foreign trade report showed a 2nd successive monthly rebound in manufactured exports; its unclear how this discrepancy will play out. There was also a drop in the volatile farming and mining components, perhaps confirming that weather has played a big impact on 1Q GDP, above and beyond the slowing in Canada’s largest trading partner south of the border. The view will not be changed, though, that the BoC will only ease one more time to 2.75% (the market has a 50-50 risk of deeper cuts to 2.50%). Not only are the economic data likely to improve into the summer but there is evidence of pent-up renewed inflation pressures in Canada. Finally, with the US jobs report just out but Canada not reporting until next Friday it is worth noting some divergences between the two labor markets. While Canadian manufacturing was later to adjust to globalization than their US counterparts, total jobs growth in the US continues to sharply underperform Canada, especially again since the start of 2006.