The Canadian dollar has consolidated recent gains and is trading quietly on Tuesday. Currently, USD/CAD is trading at 1.2598, down 0.08% on the day. The dollar index is down 0.18% on Tuesday, dipping to 0.9248 in North America.
Canada’s economy contracts in Q2
The Canadian currency missed a golden opportunity to make some inroads against a weak US dollar, as Canada released GDP for Q2. The economy contracted 1.1% (QoQ), missing expectations and surprising the markets. Retail Sales slipped 0.7% in the second quarter and in volume terms, down 0.9%. As well, home resales and exports declined. This marked the first quarterly decline since Q2 of 2020, during the first wave of Covid-19.
The weak GDP will likely shelve any plans that the Bank of Canada had for a second round of tapering, as the weak economy simply doesn’t justify any tightening in policy. With total economic activity 1.5% lower than the pre-pandemic level (February 2020), we can expect the BoC to be in a dovish mood, and any rise in interest rates seems a long way off.
The BoC cannot determine policy simply based on the strength of the Canadian economy; policy makers must also keep a close eye on monetary policy south of the border. If the Fed embarks on a series of tapers and the BoC lags behind, the Canadian dollar could take a tumble.
The markets are looking ahead to the US non-farm payrolls release on Friday. Investors will likely be pleased with a reading of 800 thousand, and a 1.0 million-plus read could result in a taper tantrum. Conversely, a release of 500 thousand or lower would serve to pour cold water on taper hopes and would be bearish for the US dollar.
- There are resistance lines at 1.2776 and 1.2936
- The next support levels are at 1.2517 and 1.2418
For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/ 
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