Canadian Dollar Gains on USD as Housing Starts Improve in May

Andrew Klips |

The Canadian dollar shed 0.8 percent last week against the US dollar, falling under pressure of some less-than-expected Canadian economic data and the Bank of Canada commenting on why it wants the nation’s currency to remain weak. In short, a weak loonie, the nickname of the Canadian currency because of the waterfowl found on its $1 coin, helps bolster exports, something that the economy needs to continue to grow.

However, the loonie is taking back some of the losses as of about 2 PM EDT, drawing strength on a report showing expansion in the nation’s housing market. Canada Mortgage and Housing Corporation said Monday morning that housing starts rose 0.8 percent in May from April to a seasonally adjusted annual rate of 198,324 units, representing the best reading in seven months. April’s figure was revised upward to a 196,687 annual rate. Analysts expected the May figure to sink to a SAAR 185,000 units.

During May, urban starts rose to 180,813 units, helped by a jump in groundbreaking for single-detached urban homes to 63,104 units from 59,845.  Multiple urban starts slipped to 117,709 units in May from 118,640 in April.

“In May, the trend in housing starts was virtually unchanged for the third consecutive month. This is in line with CMHC’s analysis indicating that the new home construction market in Canada is headed for a soft landing in 2014,” said Bruno Duhamel, Manager, Housing and Economic Analysis at CMHC, in a statement this morning.

While some may be concerned that the housing market isn’t growing expeditiously in Canada, it’s probably more important that it’s holding steady after building quite a large bubble over the last decade. The “soft landing” mentioned by Duhamel is vital for the country to not replicate the housing market collapse in the U.S. six years ago. The three months of consistency also suggests that the housing industry is going to be a contributor to Canada’s gross domestic product in the second quarter after a tough Q1.

In the first quarter, Canadian GDP grew by an annualized 1.2 percent over the prior quarter of 2014 (+2.8%), marking the slowest growth rate since the last quarter of 2012. Construction fell 0.1 percent in the January to March quarter, keeping a thumb on growth. Business investment in residential structures fell 1.6% in the first quarter, the second consecutive quarterly decline. The value of new home construction fell 1.5%, following a 1.3% increase in the fourth quarter of 2013.

The Bank of Canada believes things are going to pick-up speed after the bitterly cold winter kept consumers at bay, calling for GDP expansion of 2.3% in 2014.

After closing last week with one Canadian dollar buying US$0.91494, the loonie has risen to US$0.91653, for gains of 0.17%. The high of the day is US$0.91705, the best mark for the Canadian dollar versus the USD since June 3.

The USD is strong again versus the rest of the world, with the ICE Dollar Index, which measures the greenback against a basket of six global currencies, rising 0.29% on the day so far.

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