Weekly Outlook: Lack Of Rate Hikes The Least Of Loonie’s Problems
With a rate hike already out of the picture the Canadian dollars are now shifting their focus to the actual health of the underlying
economy. Digesting last week’s poor employment and GDP showing, it is becoming increasingly apparent that the Bank of Canada’s decision to put the plug in rate hikes was not only justified but perhaps also a bit
late.
Shifting our focus to this week’s data, market participants will read into more symptoms of the world’s eighth largest economy to judge its
health. June building permits will the first of three indicators relating the strength in the housing market. Permits, which is prone to volatile changes from month to month, is precariously marked with an expected 2.0% contraction for the month of
June. With employment still at its 32-year low 6.1% and wages building, Canadian were likely apt to take on a loan to begin building despite rising gasoline
prices. Another reason to believe more consumers were in the market for a new house was the speculation surrounding the possibility for further hikes in mortgage rates at the
time. After the Bank of Canada’s last interest rate hike, Governor David Dodge was very vocal in suggesting that another rate hike would not be needed for some
time. With this assurance under their belts, consumers were likely more confident in taking on adjustable rate mortgages that would not immediately receive a burdensome
hike. Following up on this first housing read, a measure of July housing starts will offer the most current gauge the sector has to
offer. There were a predicted 225,000 groundbreakings over the period, which would drag the gauge below the rolling 12-month average 232,000
starts. The contraction in this read is a little more soundly based as consumers began to show the effects of higher gasoline on their up-until-then unshakable levels of optimism. The final say on housing for the week will come in the form of
inflation. Prices for new house are expected to have grown 1.0%, cooling somewhat from the previous month’s record 1.3% jump. Sustained price growth through June is well-founded given the three consecutive months of growth in housing
starts. The final indicator for the week will be the country’s trade balance from
June. Strong rebounds in a few key commodities over the month, especially the record-high in crude oil, should fund easily fund the positive gap.
Over the past week, the Canadian economy has seen its once praised economic strength fade away with a few big disappointing releases. Asking for bad or worst news first, loonie traders were offered the worst on
Monday. According to the government calculations, the Canadian economy was unchanged for the month of
May. The stagnant report was the first in eight months and was a glowing reminder of the Bank of Canada’s decision to halt its tight monetary policy just weeks
before. When the central bank defied hawkish speculators’ premature inflation sound off, they had said the effects of previous rate hikes were likely to moderate economic and price growth to sustainable levels in the near
future. In the aftermath of the decision, the CPI was the first to show a major correction and now GDP is
following. The only other active day on the calendar for fundamental flows came on
Friday. Employment data was the first piece of news to capture the market’s
attention. Another point of contention for analysts considering the future of the Canadian economy, the jobless rate bounded back from its recent historical low 6.1% to a more substantial 6.4% in the span of a single
month. This was the product of a second month of net layoffs from employers, the first such back-to-back firing in two
years. With employment showing signs of topping out, fears that the consumer would be unable to support the economy through domestic spending grew. Offsetting this somewhat though was the Ivey
PMI. The measure of business spending bested expectations by dropping to only 60.1 for the month against expectations of a more rapid decent to 53.0. Despite the beating the economy seemed to take with the week’s data, the loonie closed out at 1.1275 against the US dollar, only 25 points from where it began.
