Canada August GDP Disappoints

Canada reported that August GDP contracted by 0.1%, whereas the consensus expected a 0.1% increase. Small change for sure, but the sign is wrong. And it likely prevents the Canadian dollar from recovering from the recent slide that has brought it to a 4 week low against the otherwise sagging US dollar. Although the US reported a 3.5% expansion in Q3 GDP yesterday on a preliminary basis, it is not clear that the Canadian economy has exited from its recession. The economy was flat in July before the 0.1% contraction in Aug. The weakness in the report was noteworthy in the oil and gas extraction sectors that contracted 2.3%. Manufacturing remains in the doldrums, contracting 0.7%. Some may attribute the weakness in manufacturing to the strength of the Canadian dollar, but the soft demand may be a bigger culprit. What strength there was in the Canadian economy stemmed from the fiscal assistance.

Many investors recognize that Canada is in better fiscal shape than the US, but the risk is this is being exaggerated somewhat. Yesterday S&P cut the province of Ontario's credit rating a notch due to the fiscal deterioration. Canada's national budget deficit is about 6% of GDP and the government debt is about 64%.

The Canadian dollar's downsize momentum see at the end of last week and earlier this week has eased. The US dollar has found a near-term base near CAD1.0630-50. As this was just tested, the rule of alternation now suggests the upper end of the new range may be tested--this is seen near CAD1.0820-50. The data underscores the idea that Canada is lagging behind others in the recovery and in the ability to normalize policy. Key reports next week include employment and IVEY PMI for Oct and are expected to softened from the Sept readings.