USD/CAD: Loonie Rallies on as Expected GDP, Cooling US Inflation; Pair Awaits Fed

USD/CAD: Loonie Rallies on as Expected GDP, Cooling US Inflation; Pair Awaits Fed

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USD/CAD: Loonie Rallies on as Expected GDP, Cooling US Inflation; Pair Awaits Fed

By Ketki Saxena – The Canadian dollar rallied against its US counterpart today, on the combination of weaker US economic data that saw treasury yields pare back and rising investor hopes for a Fed pivot, and  an uptick in risk on sentiment that boosted crude prices, equities, and the Canadian dollar. 

Investors continue to bet on a cooling US economy and easing inflation will force the US Federal Reserve will temper its pace of aggressive rate hikes going forward, with the most recent impetus being today’s US Employment Cost Index. 


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The index, which measures workers’ compensation, decelerated from the previous month, and for a fourth consecutive month, as well as coming in below economist expectations.  after printing 1.2%, resting at 1%, below estimates of 1.1%. The dollar beat a broad based retreat against a basket of major currencies following the data, with markets raising bets that Fed will pause after its March meeting.  Financial analysts estimate the US Fed will pause once they’ve hit a 4.75% to 5% terminal rate. 

The Canadian dollar meanwhile was supported by November’s GDP data, and preliminary estimates for Q4 growth. Although the Canadian economy appears to have substantially contracted from the Q3 reading at an annualized pace, today’s reading was in line with analyst expectations and the Bank of Canada’s forecast. 

The Canadian economy grew at a 0.1% pace in November, with a similar growth forecast for December.  On an annual basis, the Gross Domestic Product (GDP) likely gained 1.6% in Q4. Based on the flash expectation for December, the Canadian economy will likely have expanded by 3.8% in 2022 from the previous year, above the Bank of Canada’s forecast for 3.6% growth. 

On a technical level, analysts at FX Street note, “The USD/CAD, Tuesday’s candle, shows that the trading range has been wide throughout the session. Even though the pair reclaimed the 20 and 50-day Exponential Moving Averages (EMAs), each at 1.3406 and 1.3457, dropped sharply beneath both, and formed a candle with a considerable up-wick, suggesting that sellers are in charge. “

“Therefore, the USD/CAD first support would be the YTD low at 1.3300, followed by the 200-day EMA at 1.3255, before sliding towards the psychological 1.3200 mark. On the other hand, if USD/CAD buyers reclaimed 1.3400, a test of the 100-day EMA is on the cards.”

On a fundamental level, analysts at FX live note, “For the next few months, USD/CAD could be stuck in a tug of war. Poor economic news will weigh on US rate expectations but it also has negative implications for global growth. Good economic news will boost the US dollar and rate hike implications but also lift the loonie on better global growth.

On net, global growth will be more important to the Canadian dollar so long as it doesn’t come with a worrisome dose of inflation.”