CAD Falls to Three-Year Low as Interest Rate Gap Widens

The Canadian Dollar (CAD) has fallen to its weakest level in over three years, despite Canada's economy experiencing its strongest growth since early 2023. The country's GDP rose by 3.3% annualized in the second quarter, surpassing the Bank of Canada's forecast of 2.5%. However, the Canadian Dollar lost ground due to a widening gap between the interest rates set by the Bank of Canada and the Federal Reserve.

The USD/CAD exchange rate traded just below 1.3900, with the 200-day Exponential Moving Average (EMA) near this level acting as resistance. The 50-day EMA near 1.3950 is declining above it, and the 1.4000 handle caps the recovery beyond that.

The Canadian economy's strong performance in the second quarter was led by a 27% jump in shipments of passenger cars and light trucks, as domestic auto production recovered from two quarters of decline. Business capital investment also rose 2.3%, breaking a five-quarter losing streak.

However, the quarter ended before the tariff arrived, which is expected to have a significant impact on Canada's economy. The single line that carried the rebound is autos, but Washington has threatened to tax cars, trucks, parts, and steel at 50% from January 1.