Canadian Dollar holds gains despite stalled domestic growth
- USD/CAD falls as rising Oil prices support the Canadian Dollar.
- Canada’s economy stalls in August for a second consecutive month.
- Persistent inflation concerns keep both the BoC and Fed open to further interest rate hikes.
USD/CAD trades on the back foot on Friday, even as the US Dollar (USD) recovers from earlier weakness. Rising Oil prices support the commodity-linked Canadian Dollar (CAD), outweighing softer-than-expected domestic growth data. At the time of writing, the pair trades around 1.3963, its lowest level since mid-September.
West Texas Intermediate (WTI) trades above $103 a barrel, climbing to its highest level since May amid concerns that the US could resume military strikes against Iran after next week’s US midterm elections. Higher Oil prices support the Canadian Dollar, as Canada is a major crude exporter.
Statistics Canada reported that the economy stalled in August for a second consecutive month. Monthly Gross Domestic Product (GDP) was unchanged, missing expectations for 0.2% growth.
Preliminary estimates point to a 0.1% contraction in September, as declines in manufacturing and in mining, quarrying, and Oil and gas extraction outweigh gains in utilities and wholesale trade. That would leave third-quarter growth at 0.3% QoQ, or roughly 1.2% annualised.
That suggests a softer pace than the Bank of Canada's (BoC) forecast of about 2% annualised growth, outlined in Wednesday’s monetary policy announcement. The BoC raised its policy rate by 25 basis points (bps) to 2.50% on Wednesday, its first hike since 2023, as higher energy costs linked to Middle East tensions add to inflation pressures.
Brown Brothers Harriman notes that the BoC struck a distinctly hawkish tone, stressing that “there could be a need to increase the policy rate further.” The bank points out that policymakers “lifted real GDP growth and headline inflation projections across the forecast horizon,” underscoring a more robust macro backdrop than previously assumed. What Haddad highlights as particularly significant is that the BoC now “sees headline CPI above its 2% target through Q4 2028.”
Across the border, the US Dollar weakened earlier on Friday as a technology stock sell-off fuelled demand for government bonds, pushing Treasury yields lower. Investors remain concerned about returns on heavy AI spending following disappointing earnings reports. However, the Greenback has since regained ground, with the US Dollar Index (DXY) recovering above 102.00 after falling to 101.59.
Persistent inflation and solid US growth continue to support expectations of additional Federal Reserve (Fed) interest rate hikes. The Fed held rates at 3.75%-4.00% on Wednesday, while September PCE data showed inflation remains above its 2% target. Traders price in around a 75% chance of a December rate hike, according to the CME FedWatch Tool.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
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