GDP growth boosts Loonie

A report today showing the Canadian economy grew faster than expected has weakened the US dollar against its Canadian counterpart, despite the Fed leaving the door open on the possibility of a taper this year.

Statistics Canada today revealed that Canadian gross domestic product increased 0.3% month-on-month in August, higher than the 0.2% that had been forecast by economists. This took the annual GDP change up from last month’s 1.4% to a more respectable 2.0%.

Both the goods-producing and service sectors advanced, despite a contraction in manufacturing, with notable growth in mining, oil and gas. Canadian GDP took a knock earlier in the year, with devastating floods in Alberta and costly strikes in Quebec back in June, but the economy should no longer be feeling the impact of these issues, meaning the August data can be considered a fair guide, free of short-term distortions.

The Bank of Canada last week dropped its intent to hike rates going forward, signalling its concern over what it describes as ‘significant slack’ in the economy. Today’s growth was modest enough to suggest the BOC is unlikely to be scrambling to re-evaluate this scenario, but the Canadian economy does appear to have a little bit more impetus in the third-quarter than previously anticipated.

By mid-afternoon in New York, USD/CAD had dropped 0.57% to 1.0414, rebounding sharply from the seven-week high that it struck yesterday in the wake of the Fed announcement. There remains a certain level of uncertainty surrounding the Fed’s tapering intentions, with the latest official statement from the FOMC not revealing too much and leaving the committee’s options open by stressing the data-contingent nature of the decision.

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