Canadian Dollar remains under pressure after flat GDP reading

USD/CAD keeps its bullish tone as higher US yields and hawkish Fed expectations support the Greenback.
Canada’s economy shows no growth in July, while preliminary data point to a modest rebound in August.
Weak US JOLTS and Consumer Confidence data fail to derail the broader US Dollar advance.

USD/CAD remains on the front foot on Tuesday, supported by broad-based strength in the US Dollar (USD), while traders also digest the latest Canadian growth data. At the time of writing, the pair trades around 1.4187, hovering near levels last seen in early July.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Canada’s Gross Domestic Product (GDP) was unchanged in July, matching market expectations but slowing from the 0.4% growth recorded in June, which was revised higher from 0.3%. The flat reading ended three consecutive months of economic expansion and pointed to a slow start to the third quarter.

Statistics Canada’s preliminary estimate showed that the economy likely expanded by 0.2% in August, led by higher output in mining and retail trade. The Bank of Canada (BoC) expects annualized growth of 1.5% in the third quarter.

The Canadian Dollar (CAD) showed little reaction to the data, as diverging Federal Reserve (Fed) and BoC policy expectations and the widening gap between US and Canadian bond yields remain the main headwinds for the Loonie. Money markets continue to price in a possible 25-basis-point (bps) rate hike in December, while most economists expect the BoC to remain on hold.

Economists at the Royal Bank of Canada noted, “Overall, the July report leaves the Bank of Canada still balancing potential downside economic growth risks, and tightening in financial conditions from higher bond yields, against resilient backward-looking economic data and risks that elevated energy costs spread into broader inflation.”

Across the border, weaker-than-expected US economic data did little to dent the US Dollar’s strength. The number of JOLTS Job Openings fell to 7.079 million in August, below the market forecast of 7.23 million. The previous reading was revised higher to 7.335 million from 7.271 million.

The Conference Board Consumer Confidence Index also fell to 81.9 in September, missing expectations of 89. The August reading was revised lower to 88.6 from 89.4.

The US Dollar remains supported by expectations that the Fed will continue raising interest rates after delivering a 25 bps hike earlier this month, with elevated Oil prices linked to the Middle East conflict keeping inflation risks tilted to the upside. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, holds near 101.37, near two-month highs.

Attention now turns to the US Personal Consumption Expenditures (PCE) Price Index, ISM Manufacturing Purchasing Managers’ Index (PMI) and Nonfarm Payrolls (NFP) report later this week. Strong inflation or labour-market data could reinforce expectations of further Fed tightening and provide additional support to USD/CAD.

Bank of Canada FAQs

What is the Bank of Canada and how does it influence the Canadian Dollar?

The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.

What is Quantitative Easing (QE) and how does it affect the Canadian Dollar?

In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.

What is Quantitative tightening (QT) and how does it affect the Canadian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.

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