Canadian Dollar Appreciates After Strong Q3 GDP

The Canadian dollar strengthened toward 1.365 per US dollar, trimming losses accumulated since late January after briefly touching 16 month highs, as labour data reduced the downside risk to Canada’s growth and policy outlook, narrowing expectations for aggressive Bank of Canada easing. January labour data showed the unemployment rate falling to 6.5%, the lowest since September 2024, driven by a sharp drop in job searchers and continued resilience in full time employment, up 0.9% year-on-year. Wage growth remained firm at 3.3%, reinforcing evidence that underlying labour cost pressures have not eased and limiting the scope for rapid rate cuts. This backdrop has supported Canadian yields relative to recent expectations and helped reprice the BoC toward a slower and more cautious easing path, underpinning the currency. The loonie has also drawn support from a pause in US dollar strength following softer US labour indicators.

The Canadian dollar weakened past 1.36 per US dollar, retreating from sixteen-month highs as weaker domestic growth signals and falling oil prices coincided with a renewed upswing in US dollar strength. Canadian momentum has softened after GDP was flat in November and goods producing industries contracted for a third time in four months led by ongoing manufacturing weakness, underscoring persistent excess supply and muted inflation pressure. This has reinforced expectations that the BoC can remain patient rather than adopt a more restrictive stance, particularly as labor market slack continues to build. At the same time, external support has faded as oil prices slid toward the low $60s per barrel amid easing geopolitical risk tied to US Iran talks, weakening Canada’s terms of trade. These pressures have been amplified by a firmer US dollar following Kevin Warsh’s nomination as Federal Reserve chair, which lifted demand for USD liquidity.

The Canadian dollar has eased back toward 1.355 per US dollar after failing to sustain gains at sixteen-month highs, as softer domestic growth signals and renewed US dollar strength reversed part of January’s rally. Recent Canadian data showed real GDP flat in November, with a third contraction in four months across goods-producing industries led by a deepening slump in manufacturing, underscoring that underlying momentum remains fragile even as services provide only limited offset. This backdrop has reinforced expectations that the Bank of Canada can afford to remain cautious rather than turn more restrictive, a view echoed in its latest decision to hold rates steady while stressing data dependence and lingering excess supply in its forward guidance. At the same time, the pullback was amplified by a firmer US dollar after political and trade headlines revived demand for USD liquidity.