FX.co ★ Canadian Dollar Pressured by USD Strength

The Canadian dollar has slipped toward C$1.4 against the US dollar, driven mainly by the strength of the US dollar, as market expectations grow that the Federal Reserve will maintain higher policy rates for an extended period. Despite some initial hawkish signals from the Bank of Canada, these were overshadowed by the robust US dollar. The recent rate cut by the Bank of Canada was largely anticipated by markets, and attention has shifted to its data-driven guidance. This guidance has reduced the likelihood of further monetary policy easing, resulting in an increase in domestic yields, although not sufficiently to outweigh the strength of the US dollar. Domestically, a weak economic environment adds to the pressure, with GDP contracting by approximately 1.6% in the second quarter and a softening labor market, notwithstanding a temporary boost from a 60,000 payroll increase that has left unemployment close to 7.1%. Meanwhile, inflation remains high, with the headline Consumer Price Index up about 2.4% year over year, and the Bank's trimmed measure at nearly 3.1%. Furthermore, softer signals from the commodity sector, ongoing US-Canada trade and tariff tensions, and Canada's efforts to expand relations with Asia to diversify its economic ties contribute to elevated external risks and limit external support for the Canadian dollar.