- USD/CAD traded near 1.3960 after the Canadian dollar reached a six-week high on Thursday.
- The Bank of Canada raised its policy rate to 2.50%, while the Federal Reserve held steady.
- Canadian GDP data are due at 8:30 a.m. ET, with monthly growth of 0.2% expected.
The Canadian dollar extended its gains on Friday after reaching a six-week high in the previous session, as a Bank of Canada rate increase narrowed the yield gap with the United States. Investors now await Canadian GDP figures for evidence that the economy can withstand further tightening.
USD/CAD traded near 1.3960, down 0.21%, slipping below Thursdayās low of 1.3966. The decline means fewer Canadian dollars are needed to buy one US dollar, reflecting a stronger loonie.
Fridayās GDP release is the next test for the currency after the Bank of Canada raised rates for the first time since July 2023 and left further increases on the table.
Why Is USD/CAD Falling Today?
The Canadian dollar is benefiting from a smaller US yield advantage following Wednesdayās Bank of Canada decision.
The gap between Canadian and US two-year government bond yields narrowed by 4.7 basis points on Thursday to approximately 128 basis points in favour of the US, Reuters reported. Earlier this month, that advantage had reached about 160 basis points.
US bonds still offer the higher yield, but the narrowing gap has made Canadian assets relatively more attractive. Klarity FX director Amo Sahota told Reuters that the shift was encouraging traders to pursue further gains in the loonie. A softer US dollar also helped. Treasury yields eased after US inflation figures broadly matched expectations, reducing support for the greenback.
Canadian GDP Data Could Drive USD/CADās Next Move
Statistics Canada will release August GDP figures on Friday at 8:30 a.m. ET. The report will also include an advance estimate for September, giving investors a more recent indication of activity.
The agencyās preliminary estimate pointed to 0.2% growth in August. Economists also expect a 0.2% monthly increase, following unchanged output in July. www150.statcan.gc.ca
A stronger result could reinforce the view that Canada has room for tighter policy, potentially supporting the loonie. A weak reading could prompt investors to scale back those expectations.
Septemberās advance estimate will matter alongside the August figure. Since the Bank of Canada has already assessed a broad improvement in third-quarter growth, investors will be looking for evidence that momentum continued towards the quarterās end.
Oil Prices Add Support to the Canadian Dollar
Elevated oil prices remain another source of support because energy is one of Canadaās major exports.
US crude futures settled around $102 a barrel on Thursday, Reuters reported. Prices fell 0.8% during the session on hopes for US-Iran peace talks but remained high enough to support the value of Canadian energy exports.
Oil also complicates the economic outlook. Higher export receipts can help the currency, while expensive fuel raises costs for households and businesses.
That leaves the loonie sensitive to geopolitical developments. A sustained decline in crude could remove some support, even if Canadian interest-rate expectations remain firm.
USD/CAD Technical Analysis: Support and Resistance
USD/CAD is testing the 1.3950ā1.3960 area after moving below Thursdayās 1.3966 low. A sustained break would bring the round-number 1.3900 level into focus.
On the upside, Fridayās session high near 1.3994 and the psychological 1.4000 threshold are the nearest hurdles. A recovery above that area would weaken the immediate downward momentum.
These levels provide reference points around the GDP release. The price snapshot alone does not establish a longer-term reversal, and a brief move through either side could fade once traders assess the details.
USD/CAD Forecast: Can the Loonie Extend Its Rally?
The near-term backdrop favours the Canadian dollar while the yield gap narrows and oil remains elevated. Strong GDP figures would add economic support to that position.
The risk is that much of the policy shift is already reflected in prices. Disappointing growth, weaker crude or renewed demand for the US dollar could interrupt the rally.
For now, whether USD/CAD holds below 1.4000 after the release will help show how much conviction remains behind the move.
Further gains would be more likely if Canadian growth supports additional rate increases and the US yield advantage continues to narrow. Weaker oil prices or disappointing economic data could interrupt the rally.
The Bank of Canadaās rate increase has narrowed the gap between Canadian and US bond yields. Elevated oil prices have also supported the loonie, while softer US yields have weighed on the greenback.
Stronger-than-expected GDP can support the Canadian dollar by increasing expectations for tighter monetary policy, pushing USD/CAD lower. A weaker report can have the opposite effect, particularly if it reduces expectations for another rate increase.