USD/CAD rallies above 1.3600 on weak Canada GDP, mixed US data

Canada’s economy grew at a 0% pace in Q4, annualized, justifying the BoC pause in rate increases.
US house prices tumbled while the US Dollar continued to trade on the backfoot.
USD/CAD Price Analysis: Further upside is warranted on a daily close above 1.3600.

Christian Borjon Valencia FXStreet

After dismal economic data reported from Canada, the USD/CAD advances toward the 1.3600 figure, while the US Dollar (USD) registers some losses. In addition, market sentiment shifted sour as US equities opened in the red. At the time of writing, the USD/CAD exchanges hands at around 1.3610.

Canada’s GDP was flat, a tailwind for USD/CAD

Statistics Canada revealed the Gross Domestic Product (GDP) for Q4 came in falt at 0% QoQ, which was below the 2.9% expected. According to the agency, inventory accumulations and declines in business investment, mainly machinery, and equipment were the reasons for weaker growth in Q4.

The reading makes it unlikely the Bank of Canada (BoC) will raise rates any higher as it will not want to stiffle weak growth by putting up borrowing costs. The BoC announced at its last monetary policy meeting that it would pause rate hikes, and the GDP data reinforces that promise. This is negative for CAD and so, further USD/CAD strength is warranted, as the US Federal Reserve (Fed) is conversely still expected to continue its tightening cycle. There is speculation around the financial markets that the Fed could go as high as 6%, according to Bank of America (BofA) Global Research.

The USD/CAD jumped after the data release and printed a daily high of 1.3609. Nevertheless, after the dust had settled, the major retraced toward the 1.3590s area.

On the US front, monthly house prices dropped in December by 0.1% MoM, in data published by the US Federal Housing Finance Agency on Tuesday. At the same time, the S&P/Case-Shiller Home Price Index arrived at 4.6% YoY in December, down from 6.8% in November and lower than analysts’ estimate of 6.1%.

USD/CAD Technical analysis

The USD/CAD daily chart portrays the pair as upward biased after bottoming around 1.3200. Since posting the YTD lows at 1.3262, the USD/CAD has prolonged its gains and has broken above crucial resistance areas, like the 20, 50, and 100-day Exponential Moving Averages (EMAs). Therefore, interest rate differentials and technical momentum could pave the way for further upside.

The USD/CAD next resistance would be the daily high at 1.3609. A breach of the latter will expose the YTD high at 1.3685, ahead of 1.3700, followed by the November 3 swing high at 1.3808.

What to Watch

Author

Christian Borjon Valencia

FXStreet

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.

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