The Canadian Dollar—the Loonie—is flying off the shelves. That’s due in large part to both encouraging economic signs in the U.S. and continued, dramatic geopolitical volatility. On Friday, the euro jumped over 0.7% against the US Dollar. This was on the heels of a surprisingly high Gross Domestic Product (GDP) growth number of 2.2% in that same quarter. This boom rate really blew away all the market predictions, which were expecting a much smaller uptick of about 1.7%.
As the local currency of Canada, the Loonie (CAD) is deeply connected to the stability of the nation’s economic standing. The surprising GDP numbers have traders feeling hopeful and created a stampede of speculative buying of the currency. Entrenched economic problems, not least a growing unemployment gap between younger and older Canadians, threaten the robustness of the expansion.
Economic Indicators Fuel Loonie Demand
The Canadian economy’s impressive growth in the first quarter has been a key driver behind the Loonie’s recent ascent. The GDP grew by 2.2%, beating early projections. That’s a huge change from last quarter, when that number was downwardly revised from 2.6% to 2.1%. Such revisions can create negative shocks to market sentiment and expectations for the future value of the currency.
Traders welcomed the move probably their hustle to buy the Loonie after the declaration. In large part, that optimism stems from today’s decidedly upbeat trade relations, courtesy of the Trump administration. These relations have continued to prevent the US Dollar from trading above multi-year highs. The US is by far Canada’s largest trading partner. This means that fluctuations in the US economy greatly affect the value of the Canadian Dollar.
Additionally, Canada’s status as a top exporter of petroleum makes its currency, the Loonie, particularly susceptible to volatility in oil prices. Normally, an increase in oil prices has the effect of strengthening the Canadian Dollar since it increases the income of dollar-denominated exporters. Together, all these factors have created a perfect storm for a very strong Loonie.
Employment Challenges Persist
Even with the encouraging GDP numbers, fears continue to mount over the job market – especially for young Canadians. As the unemployment gap continues to widen, it creates long-term risks for both the stability of the economy itself and the consumer confidence and spending power that propels it. Young people are struggling to get a footing in the labor market. Such a struggle may increase the costs of economic growth and have implications for future monetary policy choices.
The Bank of Canada has an increasingly difficult task ahead of them to consider these employment concerns along with inflationary pressure and growth targets. Currently, rate markets are pricing in an 80% probability of a hold on interest rates during the Bank’s next meeting. This long-term expectation will arguably be the most important factor in determining the future path of the Canadian Dollar.
Those are short term considerations, analysts caution. Positive economic indicators will likely strengthen the Loonie in the short term. If long-term unemployment begins to have a negative effect on consumer spending and business activity, it could negate those positive gains.
Future Outlook for the Canadian Dollar
Furthermore, looking forward it seems that the CAD is not going to stop its advance with recent development. Those upbeat GDP growth figures have done wonders, pushing the Loonie back within reaching distance of six-month highs. Traders are still very bullish on its prospects, particularly as trade threats still hang over and continue to weigh on the US Dollar.
Analysts warn that outside forces could still have an outsized impact in determining the Loonie’s future performance. The US economy’s health will continue to be a central topic. Most importantly, it has an immediate and deep impact on Canada/U.S. trade dynamics. Swings in world oil prices will remain a strong driver of Canada’s export revenues and therefore Canada’s currency.