Canadian GDP Annualized (3Q) (13:30 GMT; 08:30 EST)
Expected: 2.1%
Previous: 3.4%

How Will The Markets React?

While US GDP during the third quarter accelerated at the fastest pace in four years, the Canadian economy is not expected to fare quite as well. In fact, annualized GDP is forecasted to slow to a one year low of 2.1 percent, down from 3.4 percent during the second quarter. Exports are likely to have taken a hit as the Canadian dollar rapidly appreciated to parity with the US dollar during September, hurting American demand for Canadian goods. In fact, the International Merchandise Trade surplus for that month surprisingly narrowed to C$2.645 billion, the weakest since December 1998. Meanwhile, personal consumer expenditures could fall back as well. While the Canadian labor markets remain extremely resilient, retail sales softened throughout the third quarter compared to solid gains throughout the second quarter. The combination of slowing expansion led by lackluster demand for Canadian exports and faltering domestic demand would be enough on its own to spark expectations for a rate cut by the Bank of Canada. However, October inflation readings showed a sudden drop in CPI, as the appreciation of the Canadian dollar led the costs of imported goods to plummet. Indeed, the Bank of Canada’s core CPI measure dropped 0.2 percent during the month, bringing the annual rate below their inflation target to 1.8 percent. These economic factors along with tight conditions in the credit markets will only exacerbate speculation that the Bank of Canada will follow the US Federal Reserve’s lead and make monetary policy more accommodative, as 25 percent of economists polled by Bloomberg News believe they will do, so traders should pay heed to the news given their potential impact on bond, FX, and equity markets.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bonds have rebounded back above 115.00 amidst disappointing current account figures, keeping the uptrend in the contract intact. However, Tuesday’s bearish engulfing candle is also intact. Nevertheless, with Friday’s Canadian GDP figures expected to show that economic growth slowed in Q3 from Q2, there is more upside potential for CGBs to test the high of 116.25 as the data will only contribute to speculation that the Bank of Canada will consider cutting rates when they convene next week.

FX – USD/CAD

The Canadian dollar has lost steam in recent weeks since the USD/CAD pair bottomed out at 0.9059 on November 7. While the greenback has generally gained against most of the majors during that period of time, signs that the strength of the Canadian economy is waning has only helped accelerate the rebound in USD/CAD. Thus far, the pair has had difficulty breaking through Fibonacci and psychological resistance near parity, and these levels happen to mark an ideal reversal point. Given the technical factors, it would not be surprising to see the pair fall down towards 0.9500 in coming days. However, Canadian economic data may limit losses as GDP for the third quarter is expected to slow, giving the Bank of Canada even more reason to consider cutting rates next week. If the data proves to be particularly disappointing, USD/CAD could garner enough strength to continue to test 1.00 or even break higher. Nevertheless, a sharp turn lower in the pair may go undeterred if momentum is strong enough, with a GDP reading in line with expectations only giving a USD/CAD descent brief pause. On the other hand, it is worth noting that if Canadian GDP is actually stronger than forecasts, the Canadian dollar will likely appreciate immediately against the greenback.

Equities – S&P/TSX Composite Index

Similar to the Dow Jones Industrial Average, the S&P/TSX Composite Index has bounced from the recent lows after plunging throughout much of the month of November. With volatility dying down somewhat, global equities have had an opportunity to gain and they may continue to stabilize throughout the next week. Potential bullish targets for the S&P/TSX sit above at the confluence of the 200 SMA and Fibonacci resistance at 13,732/38 as well as the confluence of the 100 SMA and Fibonacci resistance at 13,879/907. While one of the biggest event risks for worldwide stock markets remains the December 11 FOMC meeting, traders should beware the results of Friday’s Canadian GDP report, as the figures are expected to reflect a slowdown in Q3 expansion. This has the potential to weigh Canadian equities down, though the sentiment may wane throughout the trading day as broader financial news will likely make a bigger impact.

Terri Belkas is a Currency Strategist at FXCM.