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USD/CAD extends losing streak as Canada’s Q3 GDP rebound boosts the Loonie

  • USD/CAD extends its decline for a fourth straight day as Canada’s Q3 GDP rebound supports the Loonie.
  • Markets expect the BoC to hold rates in December, while the Fed is seen leaning toward a 25 bps cut next month.
  • Widening policy divergence keeps the US Dollar under pressure, maintaining a bearish bias for USD/CAD.

The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Friday as traders respond to Canada’s Q3 Gross Domestic Product (GDP) rebound. At the time of writing, USD/CAD is trading around 1.3984, extending losses for a fourth consecutive day as broad Greenback weakness keeps the pair under sustained downside pressure.

Statistics Canada reported that the economy expanded modestly in Q3, with September GDP rising 0.2% MoM, in line with expectations, after August was revised to -0.1% from -0.3%. Real GDP increased 0.6% in the third quarter, reversing the previous quarter’s -0.5% contraction, while the annualized growth rate accelerated to 2.6%, well above the 0.5% consensus and a sharp improvement from -1.8% in Q2.

The details of the report showed that Canada’s Q3 rebound was driven mainly by trade, with exports rising 0.2% while imports fell 2.2%, providing a strong positive lift to growth. Domestic demand weakened as household consumption declined, as vehicle purchases fell 2.3%, and government spending dropped 0.4%.

Looking ahead, the GDP figures are unlikely to significantly alter expectations for the Bank of Canada’s (BoC) December 10 interest rate decision. At its October meeting, the BoC cut its policy rate by 25 bps to 2.25% and signaled that this move could mark the end of the easing cycle, noting that the current level is “about right” as long as inflation and economic activity evolve in line with its projections.

In contrast, traders are increasingly pricing in a Federal Reserve (Fed) rate cut next month, following dovish-leaning remarks from key policymakers earlier in the week. According to the CME FedWatch Tool, markets are now assigning roughly an 85% probability to a 25 bps rate cut at the December 9-10 meeting.

Overall, with the BoC expected to hold rates steady in December while the Fed appears poised to ease, the US Dollar is likely to stay on the back foot, keeping the broader tone for USD/CAD tilted lower.

Bank of Canada FAQs

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.

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.

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.

Author

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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