Canadian dollar steady, GDP outperforms

Canada’s GDP rises 6.7%

Canada’s GDP in Q4 was stronger than expected, at 6.7% QoQ, ahead of the estimate of 6.5% and higher than the 5.5% gain in Q3.  The Canadian dollar’s reaction was muted, as investors are looking ahead to the Bank of Canada’s policy meeting on Wednesday. The red-hot GDP reading cements a rate hike from the BoC.

The Bank of Canada has held interest rates at 0.25% since March 2021, but policy makers are poised to raise rates by 25 basis points, to 0.50%. The BoC is raising rates ahead of the Federal Reserve and earlier than anticipated. The bank was not expected to raise rates until the second quarter, but surging inflation, which has hit a 30-year high, has pushed the timeline forward. This faster-than-expected tightening is not limited to the BoC, as the Bank of England has already embarked on a rate-tightening cycle, while the Fed could raise rates by a half-point at its meeting, although it will likely stick with the traditional 25-bps move.

As part of tightening its policy, the BoC could reduce its balance sheet (qualitative tightening), perhaps in the first quarter. Interestingly, the central bank has never tried such a move before.

Investors have priced in as many as seven rate hikes this year, as the BoC is expected to be aggressive in order to wrestle down inflation, which shows no signs of easing. Energy prices are pointing upwards, with the Ukraine crisis pushing oil prices above 100 dollars for the first time since 2014.

The situation in Ukraine remains grim, with Russian forces shelling major cities and continuing to encircle the capital Kyiv. The West has slapped severe sanctions on Moscow, including removing some Russian banks from SWIFT, the global system for fund transfers. Depending on which banks have been targeted, Russia’s ability to conduct international trade could be crippled.

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USD/CAD Technical

• USD/CAD faces resistance at 1.2825 and 1.2950
• There is support at 1.2629 and 1.2558

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