Canadian dollar ends week with gains

Canadian and US markets are closed on Monday and we are seeing very little movement from USD/CAD at the start of the new trading week.

Canada’s GDP stays steady

Ahead of the Christmas holiday, there was plenty of action on Friday. Canada’s GDP remains steady, with a modest 0.1% gain in November, identical to the October release. GDP is projected to grow at a rate of 1.2% y/y in the fourth quarter. Not a stellar result, but certainly respectable. More importantly, the reading is higher than the Bank of Canada’s forecast of 0.5% growth in Q4.

There had been speculation that the Bank of Canada might pause its current tightening cycle at the January meeting, but this now seems unlikely, due to the stronger-than-expected GDP and last week’s mixed inflation report. Headline inflation dropped slightly to 6.8%, down from 6.9%, but core inflation remains more persistent than expected. The BoC has said that future rate hikes would be data-dependent, and the Bank is unlikely to take a pause at a time when GDP and inflation are not slowing. The odds of a 25-basis point increase in January moved higher after the GDP release, to just under 66%.

US PCE Price Index falls

Inflation appears to be easing in the US, raising hopes that the worst of inflation is behind us. On Friday, the Fed’s preferred inflation indicator, the PCE Price index, slowed to 5.5% y/y in November, down from 6.1%. Also, the UoM inflation expectations dropped to 4.4% y/y in December, down from 4.6%, the lowest level since June 2021. Although there is evidence that inflation is easing, the Fed is wary about persistently strong wage growth, which could complicate the Fed’s battle to curb inflation. As we head into the New Year, all signs are that the Fed will stick to its pledge to continue raising interest rates above 5% before winding up the current rate-tightening cycle.

USD/CAD Technical

• There is resistance at 1.3686 and 1.3765
• 1.3545 and 1.3483 are providing support

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