Will GDP lift the loonie?

The Canadian dollar is trading quietly ahead of the release of Canada’s GDP for October later today. The loonie took advantage of broad US weakness on Wednesday, posting gains of 0.53%, its best daily showing since December 7^th.

Canada GDP expected to rebound

Canada’s economy was stagnant in September, with a paltry gain of 0.1%. October, however, is expected to show a strong rebound. Statistics Canada is projecting a gain of 0.8% m/m, but some solid data since this projection has added upside risk, which could translate into a gain of 1.0%. I would expect a GDP reading of 0.8% or higher to provide a boost for the Canadian dollar.

A strong GDP report could also have an impact on the Bank of Canada, which has signalled that it plans to embark on a series of hikes in 2022 (a much faster pace than the Fed). A rate hike is widely expected in Q1 2022, but the date of lift-off remains uncertain and will likely be determined by the strength of economic indicators. April is the most likely date at the present time, but an acceleration in the October GDP and higher inflation could push that date forward, perhaps as early as January.

There is a lot of uncertainty surrounding the Omicron variant, and the screaming headlines continue to impact risk appetite as well as risk barometers such as the Canadian dollar. The currency slid 1.3% last week, as Omicron raged across Europe and the US, raising fears of new health restrictions and possible lockdowns. Risk sentiment has rebounded sharply this week, as more reports show that although Omicron is much more contagious than Delta, the symptoms have been less severe. The positive news has sent the Canadian dollar higher this week.

The roller-coaster in the currency markets could well continue for the rest of December, as the markets are being driven by headline volatility rather than market trends. Therefore, caution in these turbulent, illiquid markets is strongly recommended.

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USD/CAD Technical

• • USD/CAD has support at 1.2756. Below, there is support at 1.2615
  • There is resistance at 1.2987. Above, there is resistance at 1.3077

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