Every quarter the Bank of Canada (BOC) releases a business outlook survey on the Canadian economy. It covers various areas like business activity, investment and hiring plans, pressures on production capacity, and the evolution of wages, prices, and inflation.
The report is highly valued because the companies selected to participate in the survey are handpicked based on their contribution to the Canadian’s Gross Domestic Product (GDP). Therefore, anyone interested in the future direction of the Canadian Dollar (CAD) marks the economic calendar with the date of the business outlook survey release.
Canadian Economic Recovery Continues
The survey took place in mid-November and early December of last year, and the compiled results were presented yesterday. It shows that the economic recovery continues, albeit at a slower pace.
Optimism prevails as the government and businesses have the end of the pandemic in sight with the rollout of vaccines against the COVID-19 virus. Effectively, although most companies reported sales below pre-pandemic levels, companies remain optimistic and expect higher sales for the twelve months ahead due to the pickup in economic activity.
Another important point that the report makes is that inflation, as measured by the Consumer Price Index (CPI), is expected to remain below the 2% target set by the BOC. Despite the quantitative easing program, inflationary pressures are expected to remain subdued in the medium term.
The pressure on input costs will, however, translate into higher output prices, but the process takes time and is highly dependent on the course of the pandemic and the economic recovery. Therefore, inflation is not a worry for the Bank of Canada, meaning that the central bank will keep the monetary policy accommodative for some time before taking some stimulus off the table.
All in all, the report paints a balanced picture of the Canadian economy that struggles to find its way out of the pandemic. The CAD’s strength against the USD seen in the last months was mostly the result of the reflation theme seen in financial markets lately that calls for a lower USD. However, with the new administration preparing to take charge in Washington, the reflation theme may suffer some important changes.
The 1.30 level remains key for the USDCAD pair, the most important CAD exchange rate. If the price climbs back above it, the weakness in the CAD is likely to be triggered by the higher USD rather than by the changes in the Canadian economic activity and output.