Canadian dollar dips after soft GDP

• Canada’s GDP flat in August

The Canadian dollar is lower on Tuesday. Early in the North American session, USD/CAD is trading at 1.3866, up 0.29%.

Canada’s economy flatlined in August

Canada’s economy continues to show signs of cooling down. The August GDP report came in at 0.0% m/m, unchanged from July and shy of the market consensus of 0.1%. The economy is projected to have remained flat in September, which would indicate no growth in the third quarter.

The lack of growth in the third quarter follows negative growth of -0.2% in Q2 and things could get even nastier as the lagged impact of elevated interest rates are likely to dampen economic activity moving forward. This means that there is a good chance that the economy will tip into recession in 2024.

For the Bank of Canada, the bleak economic news suggests that the current tightening cycle is over. Inflation, which is currently at 3.8%, should continue to fall even without further hikes, given the weak economy and high bond yields. Last week, BoC Senior Deputy Governor Carolyn Rogers said that the central bank could trim rates even before inflation falls back to the 2% target. The BoC has projected that the 2% target won’t be achieved until 2025, but wants the flexibility of lowering rates before hitting that target.

BoC Governor Macklem said on Monday that government spending promises could stoke inflation and hurt the central bank’s efforts to lower inflation. The BoC held rates at 5.0% at last week’s meeting, marking a third straight pause. The BoC said at the meeting that interest rate hikes were still on the table, but it’s doubtful that the BoC plans to hike rates. More likely, the BoC wants to suppress any speculation of rate cuts which would lead to more spending and push inflation higher.

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USD/CAD Technical

• USD/CAD is testing resistance at 1.3864. Above, there is resistance at 1.3950
• There is support at 1.3805 and 1.3730

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