Short Note on Canada

The Canadian dollar has appreciated about 1.5% since the start of the week. The general investment environment has improved compared to last week and the Canadian dollar responded well to yesterday's central bank swap line decision and the stronger than expected Q3 GDP (3.5% annualized vs 3.0% consensus). Yet the Canadian dollar has under-performed the other dollar bloc currencies in this week's general recover of all the major currencies against the US dollar.

Ironically, while the Reserve Bank of Australia is likely to cut rates, the Bank of Canada will not, the Canadian dollar is still the laggard.  

This underscores a point we have made previously. While the drivers of the fx market have not changed, the coefficients of the variables have, and specifically the coefficient of domestic variables appears somewhat lower and the coefficient on international variables appears elevated.

Canada's Q3 GDP was also not as strong as the headline optics would suggest. Final sales actually slowed to 0.2% from 0.8%. Business investment fell for the first time since 2009. Household consumption slowed and durable goods purchases actually fell. Housing rose to 2.6%, the largest rise since Q1 09.

Tomorrow Canada reports Nov employment figures. In Oct, Canada lost 54k jobs overall, and 72k full time jobs. The Nov figures should be better, but it seems unlikely that the Oct decline was wholly reversed.

As corrective forces are still expected to grip the major currencies, the Canadian dollar has scope to strengthen further in the days ahead. Specifically, the US dollar can test the CAD1.0050 area.