USD/CAD touches fresh 4-1/2-year highs as US consumer spending accelerates

The loonie, as the Canadian dollar is best known, declined to the lowest level in more than 4 years, following a report that showed US core personal consumption expenditures index accelerated its annual pace in December.

USD/CAD hit a session high at 1.1224, at 13:54 GMT, after which consolidation followed at 1.1210, adding 0.47% for the day. Support was likely to be received at January 30th low, 1.1151, while resistance was to be encountered at July 15th 2009 high, 1.1347.

The US Bureau of Economic Analysis reported that the core personal consumption expenditures in the US rose at an annualized 1.2% in December, in line with analysts forecasts and up from Novembers 1.1% increase. Consumer spending is regarded as a crucial economic indicator as it accounts for almost 70% of the US economy.

Yesterday, a report by the US Department of Commerce revealed that consumer spending rose by 3.3% in the fourth quarter, marking the highest advance in three years. The data was preliminary and it came after a 2% increase in the previous quarter, while analysts had expected consumer spending will rise 3.7% in Q4.

A separate report by the US Bureau of Economic Analysis revealed the preliminary gross domestic product of the country increased 3.2% in the fourth quarter, in line with analysts’ forecasts. The US economy expanded at 4.1% in the prior three months, which was the fastest pace since the first quarter of 2010.

However, data also revealed the number of initial jobless claims for the week ended January 25th, rose by 19 000 to 348 000, exceeding analysts’ estimates of an increase to 330 000. The number of jobless claims in the previous week was upward revised to 329 000 from earlier estimates of 326 000.

Greenback’s demand continued to be underpinned after the Federal Open Market Committee announced on Wednesday that it will reduce the pace of its monthly bond purchases to $65 billion from the current $75 billion. The FOMC cited improvements in the labor market and the pace of the economic growth, which started accelerating in recent quarters, in consonance with its plan to gradually withdraw from bank’s unprecedented accommodative policy. The central bank has undertaken three rounds of bond purchases since 2008, known as quantitative-easing stimulus strategy.

Meanwhile, Statistics Canada reported today that the Canadian economy expanded at a 0.2% pace in November, matching analysts forecasts. In October the Canadian GDP grew by 0.3%. According to the report, the Canadian economy expanded at an annualized pace of 2.6% in November, in line with analysts projections. In October the GDP of the country rose at an annualized rate of 2.7%.

The loonie continued to be pressured, following BoC’s statement that the currency was still strong enough, being a competitive challenge for Canadian exports.

Bank of Canada announced on January 22nd that it will keep the benchmark interest rate unchanged at 1.0%, in line with analysts’ expectations. BoC’s benchmark interest rate hasn’t been changed since September 2010.

The Central Bank lowered its inflation forecast last week, as it estimated consumer prices will increase by an annualized 0.9% in the first quarter, which is below the central bank’s 1% to 3% target band, before increasing its pace to 1.5% in the fourth quarter.

“Despite depreciating in recent months, the Canadian dollar remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports,” said BoC in its quarterly Monetary Policy Report.

Elsewhere, having reached a session low at 1.3518 at 10:00 GMT, EUR/USD traded at 1.3532 at 12:43 GMT, losing 0.17% for the day. Yesterday the pair settled 0.75% lower, the biggest daily drop since January 2nd. Support was likely to be received at January 21st low, 1.3516, while resistance was to be encountered at January 30th high, 1.3662.