Canadian Dollar: Recession and jobs data weigh against US Dollar – BBH

§ 01 Executive Snapshot

• What: Canadian Dollar (CAD) underperforms due to weak economic data and oil prices.
• Who: Brown Brothers Harriman (BBH), strategist Elias Haddad.
• Why it matters: The CAD's performance highlights economic challenges in Canada, influencing Bank of Canada rate expectations and USD/CAD trading dynamics.

§ 02 Key Developments

• Canada real GDP fell at an annualized pace of -0.1% in Q1, against a consensus and Bank of Canada projection of 1.5%.
• The contraction in Q4 GDP was revised 0.4ppt higher to -1.0%.
• The economy is expected to add +10.0k jobs in May 2023, compared to -17.5k in April, with the unemployment rate forecast to remain at 6.9%.

§ 03 Strategic Context

• The unexpected technical recession and declining oil prices have significantly undermined the CAD's strength against major currencies.
• The Bank of Canada's aggressive rate hike expectations are likely to be reevaluated in light of the weak economic indicators and rising labor market slack.

§ 04 Strategic Implications

• The CAD's underperformance may lead to a reevaluation of rate hike bets, with potential adjustments downward for the Bank of Canada's future monetary policy.
• USD/CAD may risk a modest overshoot towards technical resistance at 1.3930, influenced by the adjustments in rate expectations.

§ 05 Risks & Constraints

• Potential risks include continued economic weakness or further declines in oil prices, which could exacerbate CAD's performance.
• There is a risk that labor market conditions do not improve as expected, which could further dampen economic sentiment.

§ 06 Watchlist / Forward Signals

• Upcoming labor force data in May will be crucial for gauging the health of the Canadian economy and potential market reactions.
• Monitoring the oil market and its impact on CAD will be essential in the coming weeks as economic indicators unfold.