Canadian Economy Shrinks in February – USD/CAD Rises

Canada’s economy shrinks  in February by 0.2%. Early expectations stood on 0% after two strong months of growth. USD/CAD rises, erasing the previous falls.

USD/CAD now trades at 0.9510, up from around 0.9490 before the release. 0.9525 serves as resistance.

Update: USD/CAD edges higher, but is capped by the aforementioned resistance line.

Canada’s economy enjoyed solid growth rates of 0.5% in the past two months – in December and in January. The expectations for a slowdown in February were based on the slowdown in the US.

While the loonie is considered to be a “commodity currency”, the trade relations with the US play a more important role for the economy of Canada.

Yesterday, the US reported weak growth for the first quarter – only 1.8% at an annual pace. This was even lower than the already low expectations for a 1.9% growth rate, and significantly lower than the 3.1% growth rate reported in Q4.

So, the weakness of the American economy is also well felt in the Canadian economy. The rising prices of oil cannot push the Canadian economy all by themselves. February saw strong rises in the price of oil, as the Libyan civil war erupted.

Towards the release, USD/CAD dropped from around 0.9520 to below 0.95. Last week, the pair stopped at around 0.9450, above the support line of 0.9416. These are the lowest levels since 2007. Resistance is found at 0.96.

For more technical analysis and events, see the USD/CAD forecast.

Quite a few second tier US figures were released at the same time. Personal spending rose by 0.6%, as expected. Personal income rose by 0.5%, exceeding expectations for a rise of 0.3%. The  core PCE price index rose by 0.1%, as expected, and the quarterly employment cost index exceeded expectations and rose by rising by 0.6% instead of 0.5%. All in all, they were within expectations.

Later in the US, Chicago PMI is expected to ease from the extremely high levels of 70.6 to 68.7, while the consumer sentiment is likely to be revised to the upside, from 69.6 to 70 points.

Towards the end of the day, Ben Bernanke will speak again. On Wednesday, Bernanke announced QE2 Lite – which hurt the dollar. This dovish sentiment might weaken the dollar once again.