Article by ForexTime
The USD/CAD continued to move higher despite solid data released in Canada that likely puts the Bank of Canada on a similar trajectory as the Federal Reserve. The recent mixed economic data, still shows that Canada remains on track for at least an 0.2% month over month gain in July GDP that sets the stage for a better than 3% reading on Q3 GDP. The Bank of Canada’s 2.3% GDP projection will likely fall short of the actual GDP print. Back to back GDP gains in the 3% region would imply a reduction in spare capacity, and would add to the pressure on the Bank to drop the neutral bias in favor of a mild tightening bias.
Retail sales fell 0.1% in July, contrary to projections for a modest gain but not out of line with the risks flagged for this report. There may have been a seasonal component as general merchandise sales fell 2.7% after the 4.1% gain in June. On the bright side, vehicle and parts dealer sales rose 1.6% after the flat reading in June, resuming the solid trajectory seen in April.
The trade report provided mostly good news for the July and Q3 GDP outlook. The 1.7% rise in export volumes suggested that industries focused on export markets continued to benefit from a weaker Canadian dollar and an improving U.S. growth backdrop. Moreover, the gain in export trade volumes opened the door to a Q3 net export gain, as it contrasted with the 0.6% month over month rise in July import volumes.
The Bank of Canada has taken the climb in core CPI in stride, noting that it was due to transitory factors and not a change in domestic economic fundamentals. Q3 GDP still on track for a 3.2% pace, 2.0% core CPI adds to the challenge faced by the banks neutral bias. While uncertainty from abroad will continue to underpin steady rates, the growth and inflation trajectories support rate hikes in the second half of 2015.
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