TORONTO: The Canadian dollar strengthened sharply against its US counterpart on Tuesday after data showed the economy grew at a faster pace than forecast during the fourth quarter, reinforcing expectations that the Bank of Canada will likely keep interest rates on hold.
Consumer spending and a build up in inventories offset a decline in exports, putting the annualized rate for gross domestic product at 2.4 percent, higher than the 2 percent economists had expected. Still, the figure was a step down from an upwardly revised 3.2 percent in the third quarter.
"The Canadian dollar has seen a positive reaction in the aftermath. I think personally as an FX strategist I would be fading the move and using it as an opportunity to sell the Canadian dollar," said Greg Moore, senior currency strategist at RBC Capital Markets.
The Canadian dollar, which was outperforming nearly all of its major currency counterparts, was trading at C$1.2460 to the greenback, or 80.26 US cents at around 9:14 a.m. (1414 GMT), stronger than Monday's finish at C$1.2535, or 79.78 US cents. Earlier, it touched its firmest level of the session at C$1.2434, or 80.42 US cents.
The data supports expectations the Bank of Canada will keep rates on hold when it makes its next monetary policy announcement on Wednesday. Markets were pricing in about a 20 percent chance of a 25 basis point cut, down from around a 25 percent chance prior to news.
"The encouraging revisions and a decent hand off into Q1 I think does keep us with a better-than-feared outcome for the Canadian economy," said David Tulk, chief Canada macro strategist at TD Securities.
Canadian government bond prices were lower across the maturity curve, with the two-year falling 6.5 Canadian cents to yield 0.526 percent and the benchmark 10-year losing 23 Canadian cents to yield 1.396 percent.
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