The US dollar is broadly lower on Friday, as the greenback takes a pause after strong gains. The Canadian dollar has extended its gains, as USD/CAD is trading at 1.2740, down 0.46% on the day.
Canada’s GDP expected to accelerate
The week wraps up with Canada’s GDP report for February. The consensus stands at a respectable 0.8% (MoM), after a small gain of 0.2% in January. The economy has been performing well has the covid pandemic subsides – perhaps too well, according to BoC Governor Macklem. On Thursday, Macklem went straight to the point, telling a Senate Committee that the economy is overheating, and “we need to cool growth, to cool inflation”. He added that he planned to raise interest rates in order to achieve these goals. Like the US, Canada has been hit hard by spiralling inflation, which rose to 6.7% in March, its highest level since 1991. Like the Fed, the BoC is sending out hawkish signals to the markets. The BoC raised rates by a half-point earlier this month and has hinted that it could deliver another such increase at the June 1st meeting.
The BoC’s aggressive tightening cycle will allow it to keep in sync with the Fed. This means that the Canadian dollar won’t lose ground due to the Fed’s tightening. The Canadian dollar is also benefitting from oil prices, which remain above the 100-dollar mark and could rise if Europe bans oil imports from Russia. The risk is to the upside for the Canadian dollar, although things can, of course, change in a hurry.
The FOMC meets next week, and all signs are that the Fed will deliver a supersize 0.50% rate hike. This is not surprising, given that inflation is galloping at 30-year highs. Investors will be focusing on the tone of the rate statement and will be looking for hints about further rate increases.
- USD/CAD has broken below support at 1.2795, a monthly line. 1.2632 is the next support line
- There is resistance at 1.2899 and 1.3071
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