The downside of the data-dependent strategy by the U.S. Federal Reserve is that economic data tends to be hard to predict which creates volatility without the guiding hand of a central bank.
The Fed has decided that forward guidance is a thing of the past and is willing to take a step back, and let the market operate on an indicator release-by-release basis rather than the longer cycle of having policy members interpret the big picture. The U.S. economy has lost the momentum of 2014 as harsh winter conditions and lower oil prices took a toll in the first quarter of 2015. Employment continues to be the main driver of growth, but all other components continue to slow down.
Canada is dependent on the U.S., and although the former nation is riding a wave after the unexpected rise in oil prices, it might find a strong currency is detrimental to its export-driven recovery. The monthly gross domestic product (GDP) update is expected to be an improvement over last month’s flat reading. The higher granularity of the report month-to-month versus other quarterly reports gives the Canadian data more accuracy so that expectations are usually not far off the mark. Canada faces growth challenges as it lost the contributions from high oil revenues as crude was under pressure in 2014. It is too soon to say if the surge in prices in 2015 is sustainable as demand has not changed radically, and oil-producing nations continue to pump crude with wild abandon. The sooner Canada can make the transition back to manufacturing and services as the main drivers of growth, the stronger and more resilient its economy will be.
The U.S. preliminary GDP is the second estimate to be released on the first quarter of the year. The advance GDP was released on April 29 with a disappointing 0.2% on a forecast of 1.0% growth. The third and final figure will be released on June 24.
The Fed has stressed that the first quarter will show lower-than-expected growth given the transitory factors, but the central bank remains optimistic about the economy shaking off those effects by the second quarter. Data dependency will make this release a highlight given the short week, and as the forex market gets ready for the release of the nonfarm payrolls report the following Friday.
Friday, May 29 8:30 a.m. – CAD GDP month-over-month and USD preliminary GDP quarter-over-quarter
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Alfonso Esparza
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
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