Canada's Economy Shows Signs of Rebound; US Dollar's Fate Hangs in the Balance

In December, Canada's economy likely experienced growth, following a more substantial expansion in November than anticipated. The preliminary estimate by Statistics Canada suggests a probable 0.3% expansion in December, resulting in an annualized growth rate of 1.2% for the fourth quarter. This positive trajectory indicates a rebound in the final quarter of the year, countering the 1.1% contraction observed in the third quarter. If confirmed, this data suggests that Canada likely avoided a technical recession.

In contrast, Canadian manufacturing faced a ninth consecutive month of decline in January. However, there was a slowdown in the contraction pace due to easing inflation pressures and increased business confidence about the economic outlook. Despite this, concerns arose as the average lead times for input deliveries lengthened, signaling shipping delays attributed to the Red Sea and Suez Canal crisis.

Small businesses in Canada, particularly those with fewer than 100 employees, face an elevated risk of bankruptcy after the government ended pandemic-era support last month. With the economy slowing and interest rates at a 22-year high, the potential spike in bankruptcies, already up by 38% in the first 11 months of 2023, poses a threat to economic growth.

Bank of Canada Governor Tiff Macklem cautioned against major spending increases in the upcoming federal budget, emphasizing the importance of not hindering the central bank's efforts to combat stubborn inflation. The Bank of Canada has maintained a 5% key overnight rate, the highest in 22 years, to address inflation, even as GDP growth remains modest. The governor highlighted the possibility of further interest rate adjustments based on unexpected developments, such as supply chain disruptions. Money markets have reduced the likelihood of an April rate cut from 51% to 42%.

In the U.S., Federal Reserve Chair Jerome Powell tempered expectations of imminent rate cuts, emphasizing the need for greater confidence in sustained cooling of inflation before considering a reduction. U.S. worker productivity outpaced expectations in the fourth quarter, aiding the Fed in controlling unit labor costs to combat inflation. However, concerns persist as labor market momentum weakens, with a rise in unemployment benefit claims and job cut announcements in January.

Market expectations for a Fed rate cut in March have diminished, with a 38% chance compared to over 70% a month ago. The CME FedWatch tool also shows reduced anticipation of an early spring rate cut, dropping to a 35% possibility from 73% in late December. Hence, it could influence the strength of the U.S. dollar, and there is a possibility that it might receive some additional backing during this timeframe. However, the upward trend is anticipated to be limited by the substantial difference in returns between the two nations.

Data for Technical Analysis (5H) CFD USD/CAD

Resistance : 1.3392, 1.3397, 1.3406

Support : 1.3374, 1.3369, 1.3360

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.3364 - 1.3374 is touched, but the support at 1.3374 cannot be broken, the TP may be set around 1.3396 and the SL around 1.3359, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3392 - 1.3402, TP may be set around 1.3418 and SL around 1.3369, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3392 - 1.3402 is touched, but the resistance 1.3392 cannot be broken, the TP may be set around 1.3373 and the SL around 1.3407, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3364 - 1.3374, TP may be set around 1.3350 and SL around 1.3397, or up to the risk appetite.       

Pivot Points Feb 2, 2024 03:40AM GMT