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US Dollar Canadian Dollar (USD/CAD) Exchange Rate Climbs as Canadian GDP Growth Disappoints

March 2, 2018 - Written by John Cameron

Canadian GDP Slowdown Worse than Anticipated – Canadian Dollar (CAD) Exchange Rates Tumble

The US Dollar Canadian Dollar (USD/CAD) exchange rate climbed higher on Friday, supported by poor expansion in Canada’s gross domestic product (GDP) reading.

According to statistics Canada, the pace of growth in Canada’s economy dropped month-on-month to a disappointing 0.1% in December, down from the previous period’s 0.4% but consistent with the forecast.
The Q4 2017 reading remained soft at 0.4%, however, on-par with the previous print but below the forecast of 0.5%.

Annualised, this marked a pace of 1.7% for Q4, down from expectations of 2%.

This slower-than-expected deceleration was largely due to signs that indebted households have now begun to slow down on their spending, with the Canadian economy as a whole seeming to have lost momentum due to longstanding productivity issues.

David Madani, Senior Canada Economist at Capital Economics noted:

‘While most forecasters expect the pace of growth to be slower in 2018, we still believe that there’s a growing risk of the economy stumbling badly’.

This news gives the Bank of Canada (BoC) even more reason to be cautious, with analysts now expecting the central bank to hold steady on its rate increases until the second half of this year, or even until 2019.

Trump Talks Tough on Trade - US Dollar Canadian Dollar (USD/CAD) Exchange Rate Finds Support

US President Donald Trump announced proposals to impose an import tariff on steel and aluminium late on Thursday, a decision that prompted a great deal of tumult amongst the markets.

The President asserted that these tariffs would protect US producers ‘for a long time’, arguing that they would promote the creation of manufacturing plants in the US, rather than abroad.

Investors were taken by surprise but the news, however, largely anxious that the tariffs could provoke a global trade war – particularly if China decides to retaliate.

Trump was unconvinced, however, arguing that the US trade deficit with China gives them leeway to get tougher (a stance he has touted since long before the election).

Trump stated:

‘When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore – we win big. It’s easy!’

This news bodes poorly for the ‘Loonie’, as said tariffs could potentially hurt NAFTA, especially with Canada being the biggest foreign supplier of US steel.

US Dollar Canadian Dollar (USD/CAD) Exchange Rate Forecast: US Fed Rate Hike Prospects Liable to Provide Medium-Term USD Support

The US Dollar Canadian Dollar (USD/CAD) exchange rate could extend its gains in the medium-term, with anticipation for a rate hike in March continuing to increase.

This has largely been driven by recent comments from US Fed Chairman Jerome Powell, with his Congressional testimony highlighting the current strength of the US economy, particularly the higher-than-expected inflation rate, record low unemployment and strength within the private sector, as reasons to move hawkishly.

Indeed, unlike his predecessor Janet Yellen, Powell has unambiguously indicated that the Fed intends on switching focus from nurturing growth to controlling inflation, with a possible 4, rather than 3 interest rates now expected this year.
As we move towards the Fed’s next policy decision it is now likely that the USD/CAD exchange rate will gain even more ground.
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