Canadian Dollar Extends Rally On The Back Of A Surprise Surplus
Canada released trade balance data on Wednesday, and the market was caught by surprise by the swing to surplus. According to the data, Canada recorded a trade surplus in May on the back of rising exports, and a rebounded oil price.
From deficit to surplus
Canada has had brief moments of surplus since 2013 due to headwinds in global trade and uncertainties in the oil markets. To be sure, the last major surplus was recorded in 2014 and a brief jump in the 2016/2017 financial year.
Conditions in global trade are not better in any significant way and, as such, economists had predicted a deficit of about CAD 1.7 billion for May. In the previous month, the country had run a deficit of CAD 1.1 billion.
But Statistics Canada revealed that contrary to consensus opinion, the economy experienced a surplus of CAD 762 million in May. The biggest driver of the surplus is a 4.6% jump in Canada's exports, where 3.7% went to the southern neighbor.
Following the strong data, the Canadian dollar rallied against major rivals on Wednesday. Against the US dollar, the loonie gained 0.2% in early Wednesday trading sessions settling at CAD 1.3077 per USD.
The greenback is under pressure
The resurgence of the loonie puts more pressure on the USD/CAD pair, especially after poor US employment data resulted in a softer greenback. Overall, the CAD rallied 0.34% against the dollar, and analysts predict more gains in the short-term.
The CAD is getting important support from the surprise surplus and rebounding oil prices. On the flip side, the US dollar is under pressure from multiple directions. In particular, ADP data shows that the U.S. created less private-sector jobs compared to the average number of jobs created in the three months to April.
The uncertainty in the U.S-China trade war is not helping either. Although the Presidents of the two economic supremos met during this year’s G20 meeting in Osaka, Japan, little progress has been made towards a deal.
Bank of Canada can breathe easily for now
The poor performing US dollar is putting pressure on the Fed to ease its monetary policy. To be sure, the ADP data showed that private payrolls picked up at lesser rates than market expectation. As such, the Fed’s case for a rate cut is stronger now. The market is now keenly waiting for the outcome of the policy meeting, which will happen at the tail end of July.
Usually, the policy direction of the Fed has a huge impact on the rate decisions by the Bank of Canada. But the surprise surplus has upset the status quo. At present, the central bank expects growth to the firm in the short term. As such, the bank is not under any pressure to adjust the rate.
Therefore, if the Fed goes ahead to exercise a rate cut this month, the Bank of Canada is likely to keep its rates constant. This will be a unique position for the bank as most of its peers are easing policy. In Australia, the RBA just cut rates for the second month in a row in the face of a flagging economy.