CAD Falls on Fed Inflation Warning Despite Strong Growth

The Canadian Dollar (CAD) experienced a decline against the US Dollar (USD) on Friday, marking its worst quarter since 2023. Despite Canada's strong GDP growth of 3.3% annualized in the second quarter, the CAD fell to around 1.3900.

This unexpected move was largely driven by the Federal Reserve's Chair warning that the committee still has work ahead of it in terms of taming inflation, which pushed two-year Treasury yields to a one-month high and caused USD/CAD to rise roughly 50 pips within half an hour.

The Canadian economy grew at its fastest pace since early 2023, but the country's growth was capped by the 200-day Exponential Moving Average (EMA) near 1.3900. The GDP growth figure of 3.3% annualized was also above the Bank of Canada's forecast of 2.5%, and a revision to the first quarter erased the technical recession that had framed every rate discussion in Ottawa since May.

The Canadian Dollar has never followed the posted spread between the two policy rates, which barely moved all year but is now expected to widen without any Canadian input.