Canadian dollar shrugs as GDP beats estimates

The Canadian dollar is showing limited movement on Friday. In the European session, USD/CAD is trading at 1.3576, down 0.03%.

Canada’s GDP expands by 1.0%

The Canadian economy grew by 1.0% y/y in the fourth quarter of 2023, beating the market estimate of 0.8%. This marked a strong turnaround from the revised 0.5% decline in the third quarter. The strong gain was driven by a rise in exports .On a monthly basis, GDP was flat in December but the preliminary estimate for January stands at 0.4% m/m.

The Q4 GDP release is much stronger than the Bank of Canada expected, as it projected in February that GDP would be flat. The BoC meets on March 6th and is expected to maintain its cash rate at 5.0% for a fourth straight time.

The markets have widely priced in a rate cut at either the June or July meetings, but the BOC remains very cautious, especially with inflation running at 2.9%, well above the 2% target. At the January meeting, the BoC noted that core CPI remains sticky and wage inflation was over 4%. The BoC projected that inflation wouldn’t drop to the 2% target until 2025. With that mindset, it’s difficult to see the BoC trimming rates in mid-2024, unless inflation falls faster than expected or key economic releases, such as GDP and job growth, are much softer than expected.

In the US, the markets have slashed their expectations for rate cuts. In January, investors had priced in up to six cuts, but that is down to three, which is line with Fed projections. Fed members continue to send out a cautious message, saying that inflation is moving in the right direction but the ride to the 2% target could be bumpy and the Fed won’t rush into lowering rates.

USD/CAD Technical

USD/CAD tested resistance at 1.3591 earlier. Above, there is resistance at 1.3645
1.3550 and 1.3496 are the next support levels

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