Is Canada in Recession Already?

The Greek drama continues but we change gears today and take a closer look at the Canadian dollar after a soft GDP report. We also look at the quarter and Japanese Tankan report due later. On Tuesday, the Aussie was the top performer while its kiwi cousin lagged.  A new EUR trade was added to the Premium Insights, with 3 charts supporting the technical case. Our long AUDNZD from 1.1100 is 280 pips in the green and nears its final target.

The market moving news on Tuesday was Canadian GDP. It's April data so it's a bit stale but that didn't stop a more than 120 pip move in the loonie. Growth contracted 0.1% compared to +0.1% expected. That left year-over-year growth at 1.2% compared to 1.5% expected.

USD/CAD was trading at 1.2360 and finished the day at 1.2485, despite a 1% rally in oil prices. The pair closed at the highest since June 3. The move may be overdone given the lag in the data, quarter-end and other flows because Wednesday is a holiday in Canada but worries in Canada are mounting.

The Canadian economy contracted at a 0.6% annualized pace in Q1 and contracting growth in the first month of Q2 raises the chance of a probability and, by extension, a Bank of Canada rate cut. The OIS market went form pricing a 25% chance of a cut by year-end to a 60% likelihood.

BOC Gov Poloz's defining characteristic in the past few months has been optimism about growth but his defining trait throughout his tenure has been the ability to change his mind when he's wrong, sometimes quickly. There isn't enough evidence yet but if Canadian numbers continue to disappoint and oil begins to slide, the loonie could easily be the worst performer in Q3.

Looking at Q2, the pound was the top G10 currency after election nerves were soothed and economic data was strong. The kiwi was the worst performer on the heels of a surprise rate cut. In stock markets, China was tops but the volatility has been extraordinary. The average trading range so far this week is 11%.

Another market that performed well was Japan. That was partially on a weak currency but the economy has also been solid. Today features a critical look at what's next with the Q2 Tankan at 2350 GMT. The large manufacturing index is expected steady at 12 with the outlook improving to 14 from 10.  Another spot to watch is the All Large Industry CAPEX metric; it's expected to rise 5.3% in a critical sign of investment from Japanese companies.