USD/CAD 10 mins
The Canadian economy grew at a 1.0% annualized rate in Q1, which was in-line with forecasts but a further drilling down in the data highlights a troubling trend. GDP was flat in August, then grew just 0.1% in Sepemteber and the advance estimate for October was +0.1%.
The slowly pace of growth is further compounded by plans to shrink the population in 2025 and 2026. Canada has relied on rapid population growth to spark economic growth, leading to a sharp turn in public sentiment around immigration. On a per capita basis, Canadian GDP fell 0.4% in the third quarter, which was the sixth consecutive quarterly decline.
With population set to fall and the housing market struggling due to high rates, the Bank of Canada overnight rate at 3.75% is needlessly high. Further, the September payroll report yesterday showed just 94,900 jobs created in the past year, with the population rising by more than 1 million.
That has market participants split on whether the Bank of Canada will cut by 50 basis points or 25 bps. Market pricing continues to favour a smaller cut but the probability is down to 61% from 70% before the data.
USD/CAD rose to 1.4040 from 1.4010 in the aftermath of the report but has since pared gains. To start the week, the pair hit a four-year high of 1.4178 as Trump threatened a 25% tariff on Canada. However the market is seeing that threat as less likely now and the pair has slowly recovered.
I spoke extensively about the Canadian dollar and outlook for the currency yesterday on BNNBloomberg.