The Canadian Dollar has had an interesting week and has shown surprising resilience against a broadly stronger US Dollar as of late. Heading into the Canada Day long weekend, we thought we would examine what’s ahead for the Canadian dollar this summer and if what we saw this week could be an indication of what’s to come.
Early in the week, the CAD saw a brief surge following stronger-than-expected Canadian inflation data, which lowered expectations of a second consecutive rate cut by the Bank of Canada (BoC) in July.
On Wednesday and Thursday, the release of US economic data saw a slight upward revision to the US Q1 GDP to 1.4%. Despite the upward revision, it was still the slowest in about two years. The data also showed a widening trade deficit, declining core durable goods orders, and a rise in jobless claims to their highest level since late 2021. The overall impact of the US data was to keep market expectations of a Federal Reserve rate cut on the radar.
On Friday morning, the Canadian Gross Domestic Product (GDP) figures for April ticked higher and the US Personal Consumption Expenditure Price Index (PCE) inflation figures tapered down slightly.
The combination of data from early in the week showing higher-than-expected inflation and stabilizing Canadian GDP numbers, coupled with what appears to be early indications of a cooling US economy, has traders speculating that the interest rate path for the BoC and the FED may be more similar than previously thought.
BMO is forecasting the BoC to pause in July and the FED to begin cutting rates in September. If that turns out to be the case, then you will most likely see a stronger Canadian dollar based on converging interest rate paths between the BoC and the FED. This week’s economic data could be an early indicator of what’s to come.
