Canadian Dollar weakens as Fed decision overshadows domestic GDP data

By Ketki Saxena

Investing.com – The Canadian dollar weakened against its US counterpart today, hit by risk-off sentiment after Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) earnings disappointed, and following a less-dovish-than-hoped-for Fed.

A rate decision from the US Federal Reserve was the main driver of action for the USDCAD pair today, overshadowing a better than expected Canadian GDP print. .

The Federal Reserve held its benchmark rate steady in a range of 5.25% to 5.50%, as had been widely expected.

However, in its monetary policy statement it signalled it would not cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%”, fanning risk aversion and helping boost the USD.

Odds of a rate cut in March dropped to roughly 55% following the announcement - compared to nearly 80% expectations for a March rate cut, which peaked earlier in the month.

Meanwhile, the Canadian November GDP came in at 0.2% month over month vs. the forecast of 0.1%. Preliminary estimates showing annualized growth of 1.2% in the fourth quarter, helping the Canadian economy avoid a technical recession in the second half of 2023.

However, analysts at Monex Canada note that today’s upside surprise belies further weakness in the Canadian economy.

They write that “any expansion was likely modest, and forward-looking indicators suggest that this strength should fade over coming months.

“The output gap is set to remain negative and should continue to weigh on inflation too, which in our view keeps the BoC on track to cut rates in April.”

Looking ahead for the pair USD/CAD Monex Canada analysts “continue to look for USDCAD to trade higher as the underlying weakness in economic growth becomes apparent once again… loonie strength is likely to prove temporary as a consequence.”