Summary:

• Canadian GDP M/M: +0.1% vs 0.0% exp
• US core PCE 2.0% vs 1.9% exp
• USDCAD falls back after making 1-year high

A batch of data from North America has caused a notable move higher in the Canadian dollar while the US equivalent has fallen back a little in the immediate reaction. Taken together this has seen the USDCAD pair drop back towards the 1.32 handle after hitting its highest level in a year earlier this week. 

First off, lets look at the Canadian data as it has caused a larger market reaction. In M/M terms GDP rose by just 0.1% in April, but given that the consensus forecast was for a reading of 0.0% this still counts as a beat. The largest contributor to this increase was manufacturing which rose by 0.8% in the month of April, despite soft manufacturing numbers in the month. Statistics Canada said much of the production ended up in inventories, so it may be reversed in the months ahead. It could also reflect a rush to produce/exports before US tariffs took effect on June 1.

 USDCAD hit its highest level in a year earlier this week but the market has run into some resistance just below the 1.34 handle and has fallen lower since the data was released. Source: xStation

One key area to look at as far as Canadian growth is concerned is the oil price due to the country’s relatively high levels of crude exports. The amount of oil extraction and the industrial level growth have exhibited a degree of correlation this decade with the drop in the former forewarning of the fall in the latter. 

 Canadian industry GDP has shown a high correlation with oil extraction in recent years and these two metrics are now roughly back in line. Source: xStation

Looking more closely at the price of Oil using Oil.WTI and the USDCAD exchange rate, we can note a large divergence in recent months. These two markets have historically enjoyed a fairly strong inverse correlation but for most of this year they have been moving together with both on the rise. Utilizing the compare charts function on xStation allows you to see this divergence – note the USDCAD axis is inverted to reflect the negative nature of the correlation. 

 

 A notable divergence between Oil.WTI and USDCAD (inverted axis) has occurred in recent months. This could be seen to suggest there’s substantial scope for USDCAD to fall (rise on the above chart) going forward. Source: xStation

At the same time as the Canadian data dropped there was also a some US release with the PCE core the most important. This gauge of inflation is often cited by the Fed and many believe it is their preferred metric as far as price pressures go. In Y/Y terms there was a slight beat with the reading rising from 1.8% to 2.0% against an expected 1.9%. Given this the market reaction was surprisingly muted with the USD failing to make any significant gains and even Gold which is typically more sensitive to US data showing minimal reaction.  

 

 Both the PCE core YoY and the CPI equivalent have been rising of late, indicating rising price pressures in the US. Source: XTB Macrobond