Canadian Dollar Hits 7-Month High as Economy Gallops 6.5% m-o-m in June

The loonie rallied against the greenback to hit a seven month high of $1.304 after the recent GDP data indicated that the country’s economy expanded by a historical high 6.5% in June, rebounding further from April’s record low level of 11.7% contraction and surpassing market anticipations for a 5.6% expansion and increasing confidence about a post Covid-19 upturn.

The Canadian dollar’s uptrend was fueled by a weak dollar. The Bank of Canada maintained its benchmark interest rate at 0.25% on mid-July and stated that it will carry on with quantitative easing program.

In the second-quarter, the country’s economy contracted at the quickest rate ever documented as business investment, consumer spending, exports and imports fell due to Covid-19.

Statistics Canada stated that the country’s GDP contracted by 11.5% in the quarter ended June. That translates to a 38.7% decline for 2020, bigger than the steepest and quickest contraction recorded in 1961.

Still, the reported 11.5% quarterly contraction was slightly better than the 12% decline forecast by Statistics Canada, but more than two times the lowest level recorded in the 2009 financial crisis, when the worst quarter posted a contraction of 4.7%.

The number reflects the huge jolt on economic activity caused by Covid-19. Interestingly, the figures also indicate that a U-turn has been taken and rebound could be sharp.

Even though Q2 was the worst quarter in the country’s history in roughly 60 years, the figures for June particularly make it the best rebound on record.

In June, the economy expanded 6.5% on m-o-m basis as provinces rebooted their operations and consumers and businesses began spending again.

However, the economy is yet to completely bounce back to pre-pandemic levels. Even after June’s robust numbers, Canada’s GDP is 9% lower than February level.

Even though retail sales have completely rebounded, top industries such as construction, manufacturing and energy sector is yet to reach the pre-pandemic output levels.

Initial data for July indicates that the economy expanded by another 3% compared to June level, making the economists believe that the rebound is continuing and will be back to pre-pandemic level.

Regarding the GDP data, Bank of Montreal economist Doug Porter opined as follows:

“Because the weakness was entirely front-loaded — the economy was essentially shut in April — there are already plenty of signs that growth will snap back with purpose in Q3.”

Brian DePratto, an economist at TD Bank was circumspectly sanguine about the outlook. DePratto said “As significant as the damage was, it was largely contained to March and April. We may be through the worst of it, but it is still a long road to normal.”

Notably, the government of Canada reported a budget deficit of C$33.58 billion in June, compared with a surplus of C$1.33 billion in the similar period last year.

Revenues fell by C$7.90 billion (28.5%), mainly mirroring the drop in tax and other revenues. In the meantime, program expenses rose by C$27.90 billion (114.40%), primarily due to an increase in transfers to businesses, individuals and other stages of government in the context of Covid-19 response initiatives.

Public debt charges declined C$0.90 billion (41.3%), mainly mirroring a decline in lower CPI (consumer price index) changes on Real Return Bonds.