• US economy stumbles in Q4
  • All eyes on Friday’s employment report
  • Deflation in Eurozone
  • Canadian economy shrinks

The US dollar was mixed on Friday after a disappointing Gross Domestic Product (GDP) report showed that the economy grew by 2.6 percent in the final quarter of the last year.  After seeing an average annualized growth rate of 4.8 percent in the two previous quarters, the market had been expecting the final quarter growth rate to be between 3 and 4 percent and, once and for all, silence the remaining skeptics who believe the economy still needed help from the Fed to sustain its expansion.

feb-2 graph

Looking carefully at the 4th quarter growth data, it is clear that a fall in exports and anemic business spending in equipment were the visual culprits for the slowdown in the last quarter.  Net exports subtracted 1.02 percent from the headline growth rate and business spending on equipment shaved another 0.11 percent.  Meanwhile, consumer spending was robust and contributed 2.8 percent of the 3.2 percent headline growth figure.

Disconcertingly, these mottled growth numbers suggest that if not for the fortuitous plunge in oil prices last year, which boosted the consumer spending by 1 percent or more, the economy would be struggling to grow, at best, at about 2 percent now.   This also explains why businesses may have cut their equipment purchases in the final quarter. They are betting that the low oil prices will eventually go up as suppliers adjust to the new prices.   Additionally, a strong dollar has become a challenging headwind for growth as American made goods become more expensive for overseas buyers and less expensive imports look more attractive for buyers at home.

So what about the dollar?  A 10 percent rally of the dollar index since December has been mostly driven by a rising market expectation that US interest rates will go higher this year.  However, if the economy stumbles in the coming months then the Federal Reserve may hold off on its planned rate increases for this year and could put the dollar rally on hold for a while.

Therefore, it is no surprise that all eyes will be on the Friday’s release of January US Employment Report to see if the economy has regained its footing last month.  Stay tuned.

EUR-USD has settled below 1.1300 early this morning.  The Eurozone inflation data for January showed that prices have fallen by -0.6 percent year-on-year and affirmed the decision of the European Central Bank to launch an aggressive bond buying initiative in March in an attempt to fight deflation.  That said, the initiative may be a bit late.

GBP-USD is trading close to 1.5100 but will be under pressure ahead of the Bank of England monetary policy meeting on Wednesday.

USD-CAD has climbed, at one point, close to 1.2800 on Friday morning after the release of November Gross Domestic Product report. It showed that the economy contracted by 0.2 percent and a drop in manufacturing output as the most since January 2009.  The CAD is looking very weak.

AUD-USD has fallen below 0.7800 ahead of the Reserve Bank of Australia meeting tomorrow. Many expect the bank will cut the short term interest rate to help boost deteriorating exports.  This could push the pair down further this week.

Have a great week.