These major developments come as Canada’s economy continues to sputter, with the Gross Domestic Product (GDP) contracting by 0.1% month-over-month in June. This drastic decline has raised alarm bells with economists and investors alike. In spite of this disappointing number, the Canadian dollar remains surprisingly resilient. It is currently trading at USD/CAD 1.3739, down just 0.04% on the day. According to analysts’ prediction, the currency has received more support at levels of 1.3732 and 1.3723.
That’s why the GDP plummeting in June was such a huge disappointment. This marked the biggest decline since February, in line with what the market had anticipated. The new quarterly data brings us some bad news. News Brief: Canada’s GDP shrank by 1.6% in Q2, along with a downward revision that revealed a meager 2% advance in Q1. This drop was particularly crushing in light of the market’s projection of -0.6% for quarterly GDP.
Canada’s economy is headed into recession. This decline is largely a result of a drop in activity in the manufacturing sector, which has been hit hard by impacts of U.S. tariffs on trade and productivity. It is not clear how resilient Canada’s recovery is, and how well it can hold up against these new pressures and outside forces.
In reaction to this dismal GDP data, money markets have shifted their expectations for monetary policy. The probability of a quarter-point cut in interest rates has increased to 48%. That’s a jump from 40%, which was the share right before the GDP report dropped. International investors are becoming more alarmed at the path that Canada has charted for its economy. This abrupt change is an indicator that the Bank of Canada will soon have to step in.
Further complicating matters on the other side of the border, the U.S. economy remains a mixed bag as well. The inflation rate for the core personal consumption expenditures price index (core PCE) climbed to 2.9% in July. That’s up from the 2.8% that was measured in June. This monthly increase of 0.3% is a clear indication that inflationary pressures are still present and may potentially dictate future Federal Reserve decisions.
Perhaps most important, the Canadian dollar on Friday capped its first positive week since July, reflecting at least some initial confidence from investors. The currency’s stability amid negative economic news suggests that market participants may be weighing various factors beyond just GDP performance.