USD/CAD: Loonie Keeps Climbing As GDP Beats Expectations

 | Dec 24, 2013 01:20AM ET

The Canadian dollar continues to post gains against its US counterpart in Monday trading. In the North American session, the USD/CAD has dipped below the 1.06 line. The Canadian dollar has recouped last week's sharp losses following the Fed announcement to begin QE tapering next month. The loonie got some help on Monday from the Canadian GDP, which rose 0.3% for the third straight month. Over in the US, Revised UoM Consumer Sentiment climbed to 82.5 points, slightly off the estimate of 82.9 points.

Earlier in the day, the Canadian GDP posted a modest gain of 0.3%, but this was more than enough to beat the estimate of 0.1%. GDP has posted three straight readings of 0.3%, and each has beaten the estimate, as the Canadian economy continues to grow at a faster pace than expected. The release boosted the Canadian dollar, which has gained over one cent since late last week. On Friday, Canadian releases were mixed. Core Retail Sales gained 0.4%, easily surpassing the estimate of 0.0%. However, inflation indicators continue to disappoint. Core CPI declined by 0.1%, shy of the estimate of a 0.1% gain.

The week ended on a positive note in the US, as the GDP climbed 4.1% in Q3, compared to 2.6% in the previous quarter. This was the indicator's sharpest gain since Q1 of 2010. The estimate stood at 3.6%. This excellent figure help push up the dollar, which had already posted sharp gains against the euro following the Fed’s taper announcement. Meanwhile, Unemployment Claims jumped to 379 thousand claims last week, up from 368 thousand the week before. This was well above the estimate of 336 thousand. The previous release's weak numbers were attributed to the holiday season, but two consecutive poor releases will certainly not comfort the markets. There was more bad news to follow, as Existing Home Sales and the Philly Fed Manufacturing Index fell short of their estimates. The Canadian dollar posted gains on Thursday following the weak US releases.

After months of standing on the sidelines, Federal Reserve Chairman Bernard Bernanke finally played his hand on Wednesday. At its policy meeting, the Fed announced that it was tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed's asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year. The currency markets reacted sharply to the news, as the Canadian dollar lost over 100 points, as the USD/CAD closed above the 1.07 level.

In its dramatic taper announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

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Overshadowed by the Fed's bombshell announcement, a two-year, bipartisan budget agreement is sailing through Congress. The deal was overwhelmingly approved in the House of Representatives last week and the Senate followed suit on Wednesday, passing the measure by a vote of 64-36. The bill will now go the President Obama for his signature before becoming law. The agreement sets limits on government spending for two years and reduces the deficit by a modest $23 billion. Democrats and Republicans both had criticism of the proposal, but there is general agreement in Washington that the compromise reached is a positive step which removes the threat of a shutdown which paralyzed the government in October for 16 days.