Canadian Dollar: GDP Disappointment Brings Rate Cuts Closer Say Economists

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The Canadian Dollar looks set to remain under pressure against the U.S. Dollar and other major currencies after economic growth data for September could mean the next move by the Bank of Canada will be a rate cut.

According to one economist we follow, the 0% GDP change for August suggests the economy is on track to deliver inflation levels far below what the Bank of Canada is currently forecasting.

"We think inflation should come in weaker than the Bank’s upwardly revised forecast, allowing it to remain on hold for the foreseeable future," says Randall Bartlett, Senior Director of Canadian Economics at Desjardins Bank.

Canada reported 0% month-on-month growth in August, which was unchanged on July's 0% but below the consensus expectation for 0.1% growth.

"The Canadian economy is already skirting a recession, with preliminary industry data for Q3 suggesting the possibility of a further slight contraction in activity to follow Q2's surprise decline," says Andrew Grantham, an economist at CIBC Bank.

The Canadian Dollar is an underperformer in the G10 when screened over a one-month timeframe, having only advanced against the Yen, New Zealand Dollar and Krone.

The bringing forward of market expectations for a Bank of Canada rate cut owing to the slowing economy will further underpin this performance.

Statistics Canada reports growth was seen in the wholesale & mining, oil & gas and transportation sectors, but this was offset by declines in manufacturing, retail and accommodation & food.

Grantham notes that for the third quarter as a whole, Canadian GDP was essentially unchanged (-0.1% annualized). "That's much weaker than the Bank of Canada's MPR forecast of 0.8% annualized growth".

CIBC says the decline in retail sales and demand in the economy provides clear evidence that previous interest rate hikes are having an impact, even before the majority of homeowners are exposed to higher interest rates.

Grantham says it "is a clear signal that rates will have to come down next year to avoid an even worse outcome."

CIBC predicts the first Bank of Canada rate cut to be delivered in Q2 next year.

"We remain of the view that the next move by the Bank will be a cut around the middle of 2024," says Desjardin Bank's Bartlett.