US GDP Commentary

The headline regarding US GDP growth slowing to 2.6% might catch the eye, but it was always expected that economic growth in the 4th quarter would slow following the outstanding 5% reading for the previous quarter. The USD remains largely supported and unchanged following the announcement as expectations for the Federal Reserve to raise interest rates this year remain unchanged. The reality is just now sinking in that the Federal Reserve will not be raising rates in the March and April timeframe that optimists were hoping for, but more likely around September.

Although USD bulls might be disappointed with the headline reading, personal spending climbed by the most since the opening quarter of 2006, which provides significant validity that the continually rising consumer confidence reading and consistent employment reports are resulting in additional consumer expenditure. With personal spending representing up to 70% of US GDP, the Federal Reserve will be pleased to hear this.

As you would expect, all the attention is on the US GDP but the real price action is in the CAD. The currency is being handed further severe punishment following its own GDP for November contracting by a monthly 0.2%. Considering the Royal Bank of Canada (RBC) confirmed late last year that it will be adversely impacted by the drop in the price of oil and the commodity has continued to decline since then, we can expected increased possibilities of further weak Canadian GDP readings in the future.

Overall though, this has been an amazing turnaround for the CAD - a currency that was in demand as we entered the middle of last year because anticipation was high for the RBC to begin raising interest rates. In the past month alone its currency has weakened by nearly 10% against the USD after a completely unexpected interest rate cut and its employment gains for the past year being revised significantly lower.