Why is the Canadian Dollar weakening as US PCE inflation and GDP reinforce hawkish Fed bets?

  • Buying interest returns to USD/CAD as the US Dollar recovers from Wednesday’s losses.
  • Third-quarter US GDP growth exceeds estimates, with PCE inflation coming in as expected.
  • Further tightening remains an option for the BoC following its rate increase to 2.50%.

Buying interest supports USD/CAD in Thursday’s American session, with the latest US economic releases reinforcing hawkish expectations for the Federal Reserve (Fed) and underpinning the US Dollar (USD). Having rebounded from an intraday low of 1.3970, the pair is trading near 1.4007 at the time of writing.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Some of the previous day’s losses have been recouped by the US Dollar Index (DXY), which is trading near 102.25. The index measures the Greenback against a basket of six major currencies.

September’s headline Personal Consumption Expenditures (PCE) Price Index increased 0.5% MoM, compared with 0.3% in August. The annual inflation rate also accelerated, reaching 3.6% from 3.4%, with both figures in line with forecasts. For the core PCE Price Index, the Fed’s preferred inflation gauge, the monthly increase was 0.3%. This matched expectations and August’s figure, which had been revised upwards from 0.2%. On an annual basis, core inflation ticked up from 3.0% to 3.1%, as anticipated.

Growth also surprised on the upside: the preliminary third-quarter Gross Domestic Product (GDP) estimate put annualised US economic expansion at 3.4%, ahead of the 3.2% forecast and up from 2.2% in the preceding quarter. September’s increases in personal income and spending, however, fell short of expectations.

These releases come after the Fed voted 10-2 on Wednesday to hold interest rates at 3.75%-4.00%. Speaking at the press conference following the meeting, Chair Kevin Warsh highlighted persistently elevated inflation and reaffirmed the Fed’s commitment to achieving price stability. On financial conditions, Warsh said that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.”

A December rate increase remains firmly on the table, given Warsh’s comments, persistent inflation and growth that exceeded forecasts. According to the CME FedWatch Tool, traders assign roughly an 83% probability to a hike.

In Canada, Wednesday brought a 25 basis point rate increase from the Bank of Canada (BoC), taking the policy rate to 2.50%. With the move already priced in, however, the Canadian Dollar (CAD) drew little support from the decision.

Pointing to the prospect of more tightening, Rabobank says the BoC’s latest policy statement “closes with the comment that ‘there could be a need to increase the policy rate further,’” suggesting this is unlikely to be a one-off increase. In response to that guidance, the bank’s Canada strategists “have therefore pencilled in another rate hike in December,” indicating that they expect policymakers may tighten policy again before the year ends.

How Is the Canadian Dollar Performing Today?

The Canadian Dollar (CAD) performed best against the Australian Dollar today. Its percentage moves against the major currencies listed are shown in the table below.

USD EUR GBP JPY CAD AUD NZD CHF
USD 0.20% 0.03% -0.05% 0.08% 0.47% 0.16% -0.02%
EUR -0.20% -0.17% -0.25% -0.13% 0.29% -0.04% -0.22%
GBP -0.03% 0.17% -0.08% 0.03% 0.43% 0.12% -0.06%
JPY 0.05% 0.25% 0.08% 0.10% 0.50% 0.16% 0.00%
CAD -0.08% 0.13% -0.03% -0.10% 0.40% 0.08% -0.09%
AUD -0.47% -0.29% -0.43% -0.50% -0.40% -0.30% -0.49%
NZD -0.16% 0.04% -0.12% -0.16% -0.08% 0.30% -0.14%
CHF 0.02% 0.22% 0.06% -0.00% 0.09% 0.49% 0.14%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. For instance, choosing the Canadian Dollar on the left and following its row across to the US Dollar gives the percentage change for CAD (base)/USD (quote) in the corresponding cell.