The Canadian dollar recently surged past 1.40 per US dollar, reaching its highest level in a month. This rise was driven by a combination of stronger-than-expected Q3 GDP data and a softer US dollar, due to increasing expectations of the Federal Reserve easing its monetary policy. Specifically, Canada’s GDP in the third quarter grew by 0.6% on a quarterly basis, with an annualized rate of 2.6%. This marks a turnaround from the previous quarter's decline, primarily attributed to a reduction in the import bill by 2.2% and a modest 0.2% increase in exports, indicating an improvement in trade that positively impacts the current account.
Domestic demand was bolstered by a 2.9% rise in government capital expenditure, notably highlighted by an 82% surge in spending on weapon systems, though household consumption dipped slightly by 0.1%. Meanwhile, the Bank of Canada maintained its policy rate at 2.25%, providing an interest-rate cushion that encourages capital flows into the Canadian dollar. Concurrently, market analysts estimate an 80% probability of a 25 basis point rate cut by the Federal Reserve in December, a move that has weakened the US dollar and alleviated a significant challenge for the Canadian currency.
