- Canadian export growth in the second quarter surged to its highest level in almost three years.
- The Canadian dollar rallied at the same time export growth suddenly surged.
- The bearish thesis on the Canadian dollar remains intact for now, especially as its rally was cut short at 2014's starting exchange rate.
Part of the thesis for my on-going bearishness on the Canadian dollar versus the U.S. dollar (NYSEARCA:FXC) has included the apparent dampening of exports by a (previously) stubbornly strong Canadian dollar. This assessment served me well through 2013 and into the first quarter of 2014 as the Canadian dollar gradually weakened. The momentum against the Canadian dollar came to a near climactic end at the end of January with the Canadian dollar hitting the final low for this cycle in late March.
Despite a recent rebound, the overall trend for the Canadian dollar is down since its 2011 peak against the U.S. dollar
Exports indeed appeared to respond to the weakening Canadian dollar with very modest growth in 2013 that contrasted with the contraction in 2012. So, I was a bit surprised to see in the report for Canada's second quarter GDP a surge in export growth just as the Canadian dollar experienced exactly three months of strength against the U.S. dollar. It is of course possible that the sudden surge is a lag from earlier currency weakness. From the GDP report:
Exports of goods and services were up 4.2% in the second quarter, after edging down 0.2% in the first quarter. This was the largest increase since the third quarter of 2011.
Exports of goods rose 4.4%, with passenger cars and light trucks (+13.0%), farm and fishing products (+13.9%) as well as forestry products and building and packaging materials (+8.7%) contributing the most to the increase.
The best quarterly performance for Canadian exports in almost three years
Source: Statistics Canada
The above chart shows that the spike higher in exports accompanied a rare spike higher in imports as well. Imports increased 2.7%, the largest gain in four years. With import prices gaining a lot more than export prices - 0.3% versus -1.2% - Canada's terms of trade weakened and tempered overall GDP growth. A sharp decline in household saving - from a rate of 5.0% to 3.9% - helped to fund a surge in consumption that likely aided the sharp gain in imports: "Household final consumption expenditure rose 0.9% in the second quarter, the strongest quarterly gain since the second quarter of 2013."
Taken together, the net response on the Canadian dollar for the day was an initial move higher and then a close below Thursday's open.
It is difficult to know what to expect next, but I will be keenly watching the next GDP report for any on-going momentum in exports. If my underlying thesis still holds water, the second quarter's surge in export growth will become an outlier as the above chart suggests it could be. The Bank of Canada certainly does not have reason to suddenly become more hawkish on monetary policy. Indeed, Governor Stephen Poloz is likely to desire an even weaker Canadian dollar to improve the terms of trade. On August 25th, Bloomberg quoted Poloz as insisting interest rates can stay low even if employment starts to pick up.
On the currency side, I have been expecting a pullback in the U.S. dollar index (NYSEARCA:UUP) that did not materialize in the past week. Whenever a natural cooling off occurs, the overall momentum in the U.S. dollar should bias FXC lower in the coming weeks, if not months.
Be careful out there!
Additional disclosure: In forex, I am short the Canadian dollar