The Canadian Dollar (CAD) gained ground against the US Dollar (USD) after Statistics Canada reported that the country's Gross Domestic Product (GDP) expanded by 0.5% in April, surpassing market expectations of a 0.4% increase and rebounding from a 0.1% contraction in March [1]. Growth was broad-based, with 14 of 20 sectors posting gains. An advance estimate from Statistics Canada suggests a further 0.1% GDP increase in May, indicating stabilization after contractions in the previous two quarters [1]. This positive GDP surprise follows stronger-than-expected inflation and labor market data earlier in the month, including a rise in the Consumer Price Index (CPI) to 3.2% year-over-year in May from 2.8% in April, and an employment increase of 87.8K after a previous decline [1].
In response to these data, TD Securities strategists argue that the market has become overly pessimistic about Canada's growth outlook and see scope for the USD/CAD pair to move lower from current levels. They have implemented a two-month 1.4050/1.39 put spread structure, expressing the view that USD/CAD can eventually trade below 1.40, citing that the recent post-FOMC rally in USD/CAD appears stretched [3].
Despite the CAD's gains, the US Dollar remains supported by expectations of a Federal Reserve rate hike, with traders pricing in a 63% chance of a September increase, according to the CME FedWatch Tool [1]. Additionally, ongoing geopolitical uncertainty, particularly regarding US-Iran negotiations, is maintaining safe-haven demand for the USD [1]. On the data front, US JOLTS Job Openings rose to 7.594 million in May, exceeding expectations of 7.3 million [1].
US consumer sentiment also improved, with the Conference Board’s Consumer Confidence Index rising to 91.2 in June from a revised 90.6 in May [2]. However, perceptions of the labor market softened, as the percentage of consumers saying jobs were 'hard to get' rose to 22.5%, the highest since January 2021 [2]. The US Dollar reversed Monday’s losses and advanced near the 101.40 barrier following this data [2].
Currency heat maps from both sources indicate that the US Dollar was the strongest against the Japanese Yen, while the Canadian Dollar posted gains against several major currencies, reflecting the positive sentiment following the GDP release [1][2].
CONCLUSION
Canada's stronger-than-expected GDP growth and improving economic data have boosted the Canadian Dollar, with analysts at TD Securities anticipating further recovery potential against the US Dollar. However, persistent US Dollar strength, driven by Fed rate hike expectations and geopolitical risks, continues to limit the downside in USD/CAD. The market is now watching for further Canadian data and central bank signals to determine the sustainability of the CAD's recovery.