Canadian flag waving with Parliament Buildings hill and Library in the background. Image source: ducdao © 123RF.com
The Canadian economy expectedly contracted in April, which was during the height of the coronavirus crisis when most of the economy was closed down. The positive news is that the scope of the contraction was not as massive as initially feared.
According to Statistics Canada, the country's Gross Domestic Product shrank by 11.6 per cent, which fell short of the initial market forecasts for a dip measuring 12.5 per cent.
Canada m/m GDP Growth Rate. Image source: TradingEconomics.com
Canada was the only country from G7 to scale down its asset purchase program in early June. This was a surprising decision going against the general course of easing that other central banks were implementing at that time.
The outcomes from this controversial judgement to go against the tide are now starting to surface. While other countries are seeing a noticeable rebound in their economic activities, the adverse impact of the economic fallout that continues to weigh down on Canada's output does not seem to be waning.
The observed GDP decrease from yesterday can now be added to the poor retail numbers and the deflationary pressures that are continuously impeding Canada's price stability.
While medical experts are frequently slamming Sweden for its controversial response to the healthcare crisis, Canada is the OECD exception with equally dubious reaction to the financial crisis.
Nevertheless, the Bank of Canada's monetary policy could have its own merits. For one, its comparatively tighter stance would not generate as much debt during the worst of the economic slump.
In other words, the Canadian economy is struggling more now but should have a more relaxed time paying back its debt-financing operations when the recovery process starts picking up steam.
That is the reason as to why investors' sentiment remains relatively high despite the muted economic performance. It is also why the Loonie is not tanking right now.
As can be seen on the 4H chart below, the USDCAD attempted to break out above the major resistance level at 1.36600, and thereby establish a new bullish uptrend. However, the greenback started depreciating against the Loonie following the release of the GDP data yesterday.
Even though the market is clearly oversold, as can be determined from the Stochastic RSI indicator, the underlying price action is likely to continue falling in the immediate future.
The pair is most likely going to reach the consolidation range's lower boundary, which is represented by the major support level at 1.35300 before the prevailing market sentiment is challenged.
USDCAD 4H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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