Economists at TD Securities are in line with the consensus for Canada’s monthly GDP report for April, suggesting USD/CAD should remain fairly insulated to signs of a moderate slowdown as renewed COVID-19 restrictions take their toll. The loonie could become more sensitive to weaker data that calls the BoC’s current policy timeline into doubts in the days ahead.

“We forecast industry-level GDP to decline by 0.8% MoM. That puts us broadly in line with flash estimates and the market consensus. A 0.8% contraction will confirm a much larger impact from COVID-19 measures than the second wave. There, headline growth remained positive despite a contraction in heavily-affected industries. We expect new flash estimates will point to a muted rebound in May. This would leave Q2 GDP tracking below BoC projections for 3.5%. That said, a modest disappointment on the growth outlook will not be enough to derail a taper at the July BoC meeting.”

“We do not look for a significant move in USD/CAD if our base case for today is confirmed as period end rebalancing flows should dominate. A larger disappointment today could see more of a reaction emerge, however.”

“While it may not be immediate, we think CAD could become more sensitive to weaker data that calls the BoC’s current policy timeline into doubts in the days ahead. Here, we note that short-positions in USD/CAD remain stretched despite the move off of the 1 June low at 1.2007. The squeeze has taken spot higher to test the 100-DMA, a measure that has attracted selling interest repeatedly over the last year.”

“While we are happy to be patient over the next several days, we think a move above last week’s high (1.2487) could see additional short-covering pressure. This would target a push higher to 1.2635, we think, which represents the 23.6% Fibonacci retracement level of the trading range since the March 2020 Pandemic Panic high.”

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