Canadian Dollar remains under pressure after flat GDP reading

The Canadian Dollar (CAD) continues to face downward pressure on Tuesday, buoyed by the overall strength of the US Dollar (USD) and the release of Canada's GDP data for July. The pair is currently trading around 1.4187, near the levels observed in early July. Canada's GDP grew unchanged in July, aligning with market expectations, but the growth rate slowed from the previously reported 0.4% to 0.2%, which marked a deceleration from the 0.4% growth seen in June.

The flat GDP reading signified the end of three consecutive months of economic expansion, hinting at a sluggish start to the third quarter. According to preliminary estimates from Statistics Canada, the economy likely expanded by 0.2% in August, with the growth driven by increased output in mining and retail trade. The Bank of Canada (BoC) anticipates an annualized growth rate of 1.5% for the third quarter.

The CAD showed minimal reaction to the new data, as traders remain uncertain about the diverging expectations of the Federal Reserve (Fed) and the BoC, as well as the widening gap between US and Canadian bond yields, which are the primary challenges for the Loonie. Money markets are pricing in a potential 25-basis-point (bps) rate hike by December, while most economists expect the BoC to maintain its current stance.

At the Royal Bank of Canada, analysts stated that the July data leaves the Bank of Canada balancing potential downside risks to economic growth, along with tightening financial conditions due to higher bond yields, against robust historical data and concerns about rising energy costs affecting broader inflation. Meanwhile, weaker-than-expected US economic data failed to weaken the USD.

The JOLTS Job Openings figure fell to 7.079 million in August, lower than the anticipated 7.23 million. The Conference Board Consumer Confidence Index also fell to 81.9 in September, missing expectations of 89. The August reading was revised downward to 88.6 from 89.4. The US Dollar Index (DXY) held near 101.37, close to a two-month high.

Market focus is now shifting towards the US Personal Consumption Expenditures (PCE) Price Index, ISM Manufacturing Purchasing Managers' Index (PMI), and Nonfarm Payrolls (NFP) report, which is due later in the week. A strong inflation or labor-market data release could bolster the case for additional Fed tightening, offering further support to the USD/CAD.

The Bank of Canada, headquartered in Ottawa, is responsible for setting interest rates and managing monetary policy in Canada, with eight scheduled meetings annually and ad hoc emergency meetings as required. The central bank's primary goal is to maintain price stability, with inflation kept between 1-3%. The BoC's main instrument to achieve this is through interest rate adjustments, along with quantitative easing and tightening when necessary.

In extreme circumstances, the Bank of Canada can utilize Quantitative Easing (QE) to purchase government or corporate bonds from financial institutions, typically resulting in a weaker Canadian Dollar (CAD). Quantitative tightening (QT) is the opposite of QE and is employed when the economy is recovering and inflation begins to rise. QE leads to a weaker CAD in the short term, while QT is typically positive for the CAD.