USD/CAD rally continues, GDP next

The Canadian dollar is looking sharp, with gains of 1.5% this week against the greenback. The week wraps up with Canadian GDP, while the US releases the Core PCE Price Index. In the European session, USD/CAD is trading at 1.3549, up 0.21%.

Canada’s GDP expected to rise

Canada’s economy recorded zero growth in the fourth quarter, ending a streak of five straight winning quarters. This was a major disappointment, as the estimate stood at 1.5%. The lack of growth is an indication that the Bank of Canada’s rate hikes have slowed economic activity, although the labor market remains surprisingly robust.

Will we see an improvement in the economy? GDP is projected to have improved to 0.3% in January, driven by growth in manufacturing and consumer spending in January. As well, the labour market crushed it, adding 150,000 new jobs in January, versus 15,000 anticipated.

The Bank of Canada always keeps a close eye on employment and inflation, which are key factors in the central bank’s rate decisions. BoC policy makers now have a new headache, namely, the banking crisis which caused market mayhem across the globe. The crisis has eased somewhat, with no new contagion since the collapse of Credit Suisse and four US banks. Still, the BoC is concerned over fallout from the crisis. BoC Deputy Governor Gravelle said this week that the BoC was monitoring the stresses to the global banking system as the bank considers its next rate move and economic projections at the April 4^th meeting.

The Bank of Canada left rates unchanged at 4.5% at its meeting earlier this month, the first time it has paused during the current rate-tightening cycle which began last year. The markets expect the BoC to continue to pause at the next meeting, although the central bank remains concerned about the robust labour market and strong wage growth.

The US wraps up its week with the Core PCE Index, the Fed’s preferred inflation indicator. The consensus estimate stands at 0.4%, versus 0.6% prior. Personal Spending and Personal Income are also expected to soften. If these indicators head lower, it would likely weigh on the US dollar, due to higher expectations of the Fed easing policy.

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USD/CAD Technical

• USD/CAD is testing resistance at 1.3553. Above, there is resistance at 1.3649
• 1.3475 and 1.3384 are providing support

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