Canadian GDP roars, the CAD looks just right – TDS

Canadian GDP bounced back in February. The reaction in CAD was fairly muted but it reinforces that the status quo of outperformance on the crosses should prevail, economists at TD Securities report.

More pressure for the Bank of Canada to bring policy back to neutral

“Industry-level GDP surprised to the upside with a robust 1.1% print in February, easily beating the market consensus for 0.8%. Growth was broad-based with a strong performance across goods (+1.5%) and services (+0.9%), while a strong flash estimate for March (+0.5%) added to the upbeat tone.”

“With February's upside surprise and solid flash estimate for March, Q1 GDP is now tracking well above BoC projections at 5.6%. This will add more pressure for the Bank to return policy to neutral and while we continue to see a high bar for 75bps, we look for a 50bp hike in June and July.”

“Without significant changes elsewhere and the prospect of doing more, not less, on BoC hikes, we look for CAD to trade on its front foot against EUR and JPY.”

“We think USD/CAD is a much trickier proposition given that the Fed has scope for a much higher terminal rate relative to the BoC. We prefer to fade a 1.24/28 range in USD/CAD until proven otherwise.”