Economics of the CAD

The Canadian Dollar's Presence Globally

The Canadian economy is largely dependent upon the Bank of Canada, as its primary responsibility is to govern the stability of the Canadian Dollar. The Bank of Canada is responsible for determining Canada’s monetary policy, which among other obvious responsibilities of a central bank is key to the positioning of the Canadian Dollar on a global level. Various economic and political factors combine to drive the ever-changing value of the CAD, but key to traders are the many economic indicators pertinent to the Canadian economy. Some of the relevant economic indicators to the CAD are released directly through the Bank of Canada, while others may be released from private data analysis firms.

Each of the economic indicators listed and described below have the potential to affect the price and stability of the CAD upon their release. There are other indicators that are directly relevant to the CAD, but that have been excluded because their impact on the price of the CAD is generally very insignificant.

The economic indicators outlined below can potentially move the price of any currency pair the CAD is involved with. These currency pairs include:

USD/CAD ~ EUR/CAD ~ AUD/CAD

Some of the below reports are commonly released by most economic powers around the globe, others are specific only to Canada. The reports are listed in alphabetical order, for more on the report and its strength ranking take a look at each individual indicator description below. For the date and time of the next release for each report please browse our current economic calendar.

Reports Listed in Alphabetical Order

(+) BOC Monetary Policy ReportLeading Indicators m/m
The BOC (Bank of Canada) publishes its Monetary Policy Report on a semi-annual basis. The report is released each year in April and October; revisions to the report are released in July and January. The report essentially provides a look into the Canadian economy through the eyes of the BOC, which of course will largely impact the sentiment of the Canadian Dollar. In April of 2007 the bank lowered its previous estimates for economic growth, a drop from 2.3% to 2.2%. Growth estimates for the coming year (2008) were also lowered, from 2.8% to 2.7%.

(+) Building permits m/m
This indicator is a measurement of new construction projects, or the number of new building permits issued in a given period. Considered a leading indicator, the information gathered from this report is used as a gauge for the pending expansion or lack thereof in the construction industry.

(+) Business Conditions Orders
The data for this report is gathered through the means of a survey, in which respondents are questioned concerning the status of purchase orders seen within the manufacturing industry. Respondents to the survey note the previous month’s level of purchase orders as ‘declining’, ‘rising’, or ‘about the same’. The data collected gives economists a temperature gauge on the pending strength of the economy, as obviously an increased trend seen the number of purchase orders within the manufacturing industry signifies a strengthening economy.

(+) Core CPI
CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. Core CPI as released by the Canadian government excludes fruit preparation, fruit, vegetables, natural gas, fuel, gasoline, inter-city transportation, mortgage interest rates and tobacco from collected data, as they are considered more volatile and can thus skew overall inflation trends. With the exclusion of volatile items, Core CPI is considered a more reliable calculation of CPI. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.

(+) Corporate Profits q/q
As one might assume, Corporate Profits is a simple measurement of all profits earned (before taxes) from business activities excluding interest owed on borrowed funds. Corporate strength and expansion of course parallels the overall economic strength of a nation, thus a positive trend seen in this indicator should positively affect the strength a nation’s currency.

(+) Core Retail Sales m/m
Core Retail Sales is a measurement of the total value of retail sales in a given period, excluding automobile sales. The exclusion of automobile sales in this indicator is because automobile sales can be rather volatile during certain months, thus skewing the overall trend of retail sales. Because a large portion of consumer spending is accounted for in this indicator and because this indicator is typically the first of the month to report numbers concerned with consumer spending, traders tend watch this indicator closely. Core Retail Sales gives traders a good look at the consumer spending situation, which of course, will account for approximately half of GDP (Gross Domestic Product). In other words, traders watch Core Retail Sales because of its lead into consumer spending, which, in turn, is important because of its lead into GDP. Rising trends seen within this indicator should positively affect the standing of a nation’s currency.

(+) CPI m/m
CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.

(+) Current Account
Current Account measures on a quarterly basis the following components: income flows, unilateral transfers, services, and imported and exported goods. More specifically, it compares the change in value of each. Essentially the indicator is a balance sheet reflecting the current status of trade with other nations. Traders seem to focus on unilateral transfer and income flow the most as they are the unique components of this indicator. Trade Balance (a separate economic indicator) reports on imported and exported goods, and most trades concerned with imports/exports give more credence to this indicator.

(+) Employment Change
The Employment Change indicator is a measurement of new jobs created within the Canadian economy throughout the previous month. Consumer spending is closely linked to the creation of new jobs, as those who are employed tend to spend more (and put more back into the economy) than those who are unemployed. Employment levels and the creation of new jobs will largely impact the strength of an economy, thus a rising trend seen in this indicator should positively impact a nation’s currency. Because this report is released early in the month it tends command the attention of traders.

(+) GDP m/m
Gross Domestic Product is considered by most the broadest, most comprehensive barometer of a country’s overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country’s GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation’s bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation’s currency on a global scale.

(+) Housing Starts
Housing starts is a measurement of the total number of new buildings or homes (single-family) constructed in the previous month. The housing market is of course largely connected with economic expansion; a slowing trend seen in this indicator would more than likely parallel a slowing economy.

(+) Interest Rate Statement
Perhaps at the core of all economic indicators are those that relate to interest rate decisions. In fact, most would argue that other economic indicators are used by the average trader as nothing more than a means to anticipate pending interest rate changes. Eight times per year the Bank of Canada (BOC) will release an Interest Rate Statement. The bulk of the statement includes an explanation of the various economic factors that influenced the change in rates (or lack thereof) for the nation’s short term interest rate, also referred to as the “overnight rate”. The report will also include insight as to what the next interest rate decision might be. Short term interest rates are of monumental importance to traders in any of the major financial markets. This is due to the fact that high interest rates attract foreign investors who are seeking the highest possible return in exchange for the lowest possible risk. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. Seasoned economists understand the relationship between inflation and interest rates, namely that inflation tends to precede higher interest rates, which ultimately increases the global demand for a nation’s currency.

(+) International Securities Transactions
This indicator is very similar to the US’s Long Term TIC Flows; essentially it is a measurement of the foreign demand for Canadian assets and debt. An increased trend seen in this indicator, or in other words, an increased foreign interest in Canadian assets and debt is said to strengthen the global position of the CAD dollar, as those seeking Canadian assets will need to convert currency before purchasing Canadian securities.

(+) Ivey PMI
PMI stands for Purchasing Managers Index. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position, factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.

(+) Leading Indicators m/m
Combining ten leading indicators in an effort to gauge the overall economic health of an economy, Leading Indicators includes some of the following economic indications: interest rate spreads, average weekly hours, new orders, housing permits, consumer expectations and stock prices.

(+) Manufacturing Shipments
This indicator is a measurement of the total dollar amount of shipments made by Canadian manufacturers in a given period.

(+) Retail Sales m/m
Retail Sales is a measurement of the total value of retail sales in a given period. Because a large portion of consumer spending is accounted for in this indicator and because this indicator is typically the first of the month to report numbers concerned with consumer spending, traders tend watch this indicator closely. Retail Sales gives traders a good look at the consumer spending situation, which of course, will account for approximately half of GDP (Gross Domestic Product). In other words, traders watch Retail Sales because of its lead into consumer spending, which, in turn, is important because of its lead into GDP. Rising trends seen within this indicator should positively affect the standing of a nation’s currency.

(+) Trade Balance
Trade balance compares the amount of imported goods and services to the amount of exported goods and services of a given economy. Economically, it is in the best interest of an economy to have more goods and services exported than have been imported. Thus, a positive trade balance measures a period in which more goods and services were exported than were imported. An increased number of exports translate to an increase in the demand for said nation’s currency, as other countries will be forced to exchange currency in order to purchase the exports. GDP (Gross Domestic Product) is also largely impacted by the trade balance, as an increase in the demand for exports will increase the work load of domestic factories, thus increasing employment levels.

(+) Unemployment Rate
The Unemployment Rate, as one might presume, measures the total number of citizens that are unemployed and who are presently seeking employment. Because consumer spending is such a large part of economic health, and those who are employed tend to spend more than those who are not, a downtrend seen in this indicator will have a positive effect on a nation’s overall economic strength. The Unemployment Report is considered by traders a lagging indicator, meaning that its insight offers little in the way of future projections. As such, this indicator is not as heavily regarded as perhaps its name would suggest.

(+) Wholesale Sales m/m
This indicator is a measurement of sum value of sales by wholesalers. Typically, this indicator tends to be more volatile than that of Retail Sales. An increase in buying trends seen in orders placed through wholesalers would of course indicate on increase in the demand placed on retailers by consumer spenders. An increase in consumer spending and related indicators would add this indicator to the list of many that when a positive trend is seen the strength of the nation’s currency should improve.