Canadian dollar recovers after strong GDP report

The Canadian dollar started the day with slight losses but recovered after Canada's GDP was stronger than expected. In the North American session, USD/CAD is unchanged at 1.3397.

Canada's GDP rises 0.2%

Canada's economy has been flat in recent months, which meant that the November GDP reading of 0.2% was a welcome, albeit modest improvement. The increase in GDP follows zero growth in October and edged above the market estimate of 0.1%. December's GDP is expected to increase by 0.3% according to Stats Canada, which translates to growth of 1.2% y/y in the fourth quarter. This would be an impressive rebound from the 1.1% decline in the third quarter.

The November gain and December estimate point to modest growth after three straight months of zero growth. This is good news for the Bank of Canada, which wants to see stronger economic activity and lower inflation before it considers chopping interest rates.

The BoC, like the Federal Reserve, is content to continue its "higher for longer" stance and let rates remain restrictive until inflation falls closer to the 2% target. The central bank has paused rates at 5.0% for four straight months but is expected to start lowering rates later this year. The BoC doesn't appear in any rush to lower rates and we are yet to see the pivot towards embracing rate cuts that Fed Chair Powell and ECB President Lagarde have taken.

The stronger-than-expected GDP release forced the markets to pare bets for an April rate cut to 42%, down from 51% prior to the GDP release. An initial rate cut is more likely in June or even later, with the timeline heavily dependent on inflation and employment data.

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USD/CAD Technical

• USD/CAD tested resistance at 1.3400 earlier. Above, there is resistance at 1.3467
• There is support at 1.3346 and 1.3279