Where there’s smoke, there’s fire


Friday’s Canadian GDP print of -0.2% vs. expectation of flat growth, put the Canadian economy into a technical recession.

I initially became bearish on Canada in March. My thesis was the country was “quietly producing awful data.” From retail sales, to housing starts, to CPI and GDP, our neighbors to the North appeared to be stalling. Given the country’s massive dependence on the commodity trade, the global race to the bottom and the notion that the Fed was setting to stage to pass the baton to the BOJ, BOC and/or RBA – and a nice technical pattern to boot, I shorted CAD futures. I expected oil to continue lower, the greenback to sustain strength and conditions in the Canadian economy to continue to deteriorate, such that the Bank of Canada would act during the April meeting.

April came and went with no central bank action. Canadian data still continued to underperform, but Oil and USD soon reversed and by the middle of May the CAD had strengthened some 4% and I was stopped out of the trade.USDCAD

Since then, the macro trends have re-reversed, yet Canada still continues to stumble. Yesterday, the BOC finally acknowledged the awful data and cut rates a quarter point- my original thesis, only 3 months late.

In truth, leverage and demand don’t seem to be problematic in either autos, housing or consumer spending. Instead, manufacturing, GDP and inflation are very troublesome.

Employment – full-time, in particular, is strong, but productivity is stagnant…CAD Prod

Industrial production is crashing…CAN Ind Prod

Exports – chief among which include energy related products, are also strongly contracting.
CAN Trade Balance

The result of which is rapidly accelerating negative GDP growth on par with 2011 pullback levels. CAN GDP Grow

Not to be outdone, inflation is nowhere to be seen. Yesterday, the BOC lowered it’s 2016 inflation outlook from 2% to sub 2%, and the trend doesn’t look to reverse anytime soon.CAN Inflation

CAN Inflation 2015

Interestingly enough, core consumer prices have trended upward very nicely, while producer prices have sharply diverged.CAN Consumer PricesCAN Producer Prices

This gives the picture of a bifurcated economy. One where consumer spending, household debt, home prices and service oriented sectors are hum ho and doing just OK. The other, directly related to manufacturing, mining and energy and exports is on the verge of rolling over.

Canada needs a weaker CAD and the most efficient path to that is through quantitative easing. Given all of the above, the terrible inflation landscape and the fact that yesterday the BOC outright stated it would consider QE, I expect BOC QE.

The technicals look ripe for a break below support levels from 2008, which were touched this morning at 1.0290. A simple fibonacci extension gives us a target of 1.0400.Screen Shot 2015-07-16 at 5.56.49 PM

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