Canada's economy contracts in November

The Canadian dollar is showing little movement on Tuesday. In the North American session, USD/CAD is trading at 1.4385, up 0.08% at the time of writing.

The GDP report on Tuesday was a good news-bad news event. The markets had low expectations for the November GDP report and the data was even weaker than expected. The economy contracted by 0.1% m/m in the initial estimate, shy of the forecast of 0.1%. The decline was largely due to decreased activity in mining, oil and gas extraction and transportation.

In October, GDP rose 0.3% m/m, after an upwardly revised 0.2% gain a month earlier and above the market estimate of 0.1%. An increase in manufacturing output, services and oil and gas transaction were the drivers behind the better-than expected expansion.

The Bank of Canada remained aggressive at the rate meeting earlier this month, chopping rates by 50 basis points. It marked the first back-to back-cut of 50 bp since the corona pandemic and brought down the cash rate to 3.25%, its lowest level since Sep. 2022.

The BoC minutes of the December meeting noted that each member of the Governing Council acknowledged that the decision was a "close call". Members said they had opted for a 50-bp cut rather than 25 bp for two reasons; inflation had fallen to the 2% target and the growth outlook for October was lower than expected.

The members agreed that more rate cuts would likely be needed and each decision would be taken "one meeting at a time". At the December meeting, Governor Macklem said that the easing cycle would be "gradual", a signal that the central bank will trim rates by 25 bp increments, barring surprises from the economic data.

• USD/CAD is testing resistance at 1.4385. Above, there is resistance at 1.4422
• 1.4337 and 1.4300 are the next support levels