Canada’s monthly gross domestic product rose 0.5% in April, outpacing the 0.4% forecast. The result points to a firmer pace of activity for the month than markets had pencilled in.
On a month-on-month basis, the 0.5% increase sets April above consensus by 0.1 percentage points. No further breakdown or sector detail was provided in the release referenced.
Economic Momentum and Market Implications
The stronger-than-expected GDP growth of 0.5% for April confirms the economy has underlying momentum, reducing the likelihood of near-term interest rate cuts from the Bank of Canada. We believe the market has been underestimating the resilience of Canadian economic activity. This data point, even though it is from two months ago, sets a strong baseline for the second quarter.
This view is reinforced by more recent figures, with May’s inflation rate coming in hotter than anticipated at 2.9% and the labor market adding a solid 45,000 jobs. These numbers suggest that the economic strength seen in April was not an isolated event. Consequently, we see the Canadian dollar as undervalued at its current level.
Positioning for a Strong Canadian Dollar Amid Policy and Commodity Support
In the coming weeks, we are positioning for a stronger CAD by buying call options on CAD futures. This strategy provides upside exposure to a strengthening currency while strictly defining our maximum risk. We anticipate the USD/CAD exchange rate could move towards the 1.3400 level as the market reprices the Bank of Canada’s policy path.
The outlook for interest rate derivatives has also shifted, with the odds of a rate cut before the fourth quarter diminishing significantly. We are looking at positions that will benefit from higher short-term rates, such as selling CORRA futures contracts. Historically, the Bank of Canada avoids cutting rates into an accelerating economy, a pattern we expect to hold true.
Furthermore, the recent stability and upward trend in oil prices, with Western Canadian Select now holding above $80 per barrel, provides an additional tailwind for the Canadian economy. This supportive commodity backdrop strengthens our conviction in a more hawkish central bank and a firmer currency. We see this as a favorable environment for being long Canadian assets relative to their U.S. counterparts.
