The Canadian dollar weakened to around C$1.42 per U.S. dollar in September, leaving the loonie near its lowest level in roughly 12 weeks as soft domestic growth and continued U.S. dollar strength weighed on the currency.

The focus heading into Monday and the start of the new trading week will be whether the loonie can stabilise after the latest signs of weaker Canadian economic momentum, or whether widening U.S.-Canada interest-rate expectations continue to favour the greenback.

Advance estimates showed Canadian real GDP increased 0.2% in August, with gains in mining and quarrying and retail trade partly offset by a decline in oil and gas extraction.

GDP was essentially unchanged in July, bringing an end to a three-month run of growth.

Although the August increase was in line with expectations, the figures highlighted a weaker start to the third quarter and reinforced expectations that the Bank of Canada will hold interest rates.

At the same time, a U.S. ban on various Canadian goods imports took effect, adding another challenge for Canada’s trade outlook.

The U.S. dollar has also strengthened against a basket of major currencies as markets increased bets on further Federal Reserve rate increases.

For the loonie, the key issue at the start of the week will be whether the widening U.S.-Canada interest-rate differential continues to drive capital toward the U.S. dollar.

Market Snapshot

Market Factor	Current Situation	What Traders Are Watching
Canadian dollar	Around C$1.42/USD	Ability to stabilise near 12-week low
August GDP	Up 0.2%	Strength of third-quarter recovery
July GDP	Essentially unchanged	Loss of previous growth momentum
Bank of Canada	Rate-hold expectations	Future policy direction
U.S. dollar	Broadly stronger	Fed rate expectations
U.S.-Canada rate differential	Expected to widen	Relative currency support
Oil and gas extraction	Declined in August	Commodity-sector performance
U.S. trade restrictions	Various Canadian imports affected	Export and growth impact

Monday Market Focus

The Canadian dollar enters Monday trading under pressure after a period of weaker domestic economic momentum.

The immediate question for currency traders will be whether the loonie can hold around the C$1.42 area or whether renewed U.S. dollar strength pushes the pair higher.

The latest GDP data has already reinforced expectations that the Bank of Canada is unlikely to rush toward further rate increases.

That leaves the Canadian dollar particularly sensitive to developments in U.S. monetary policy.

If expectations for additional Federal Reserve rate increases strengthen, the resulting interest-rate differential could provide further support for the U.S. dollar.

Canadian Growth Loses Momentum

Canada’s economy showed limited momentum heading into the third quarter.

Advance estimates indicated that real GDP increased 0.2% in August.

Mining and quarrying and retail trade provided support, while a decline in oil and gas extraction partly offset those gains.

The August increase was in line with expectations, but July GDP was essentially unchanged.

That ended a three-month run of growth and highlighted the weaker momentum entering the third quarter.

For the Bank of Canada, the combination of slower growth and existing inflation conditions creates a difficult policy balance.

Bank of Canada Rate Expectations

The softer GDP figures reinforced expectations that the Bank of Canada will hold interest rates.

For the Canadian dollar, the relative policy stance between Ottawa and Washington is particularly important.

If Canadian rates remain unchanged while U.S. rates are expected to rise, the interest-rate differential can move in favour of the U.S. dollar.

That dynamic has become one of the main sources of pressure on the loonie.

Traders will therefore be monitoring every major U.S. data release for signs that the Federal Reserve may continue tightening.

US Dollar Strengthens

The U.S. dollar has strengthened against a basket of major currencies as markets increased bets on further Federal Reserve rate increases.

This has created an additional headwind for the Canadian dollar.

Higher expected U.S. interest rates can attract capital toward dollar-denominated assets, while also increasing the relative cost of holding Canadian-dollar positions.

The loonie’s performance at the start of the week will therefore depend heavily on whether the dollar’s recent strength continues.

U.S.-Canada Rate Differential in Focus

The expected widening of the U.S.-Canada interest-rate differential is becoming increasingly important for USD/CAD.

If the Federal Reserve maintains a more restrictive policy stance while the Bank of Canada holds rates, the relative yield advantage can shift toward U.S. assets.

That can support demand for the U.S. dollar and place further pressure on the Canadian currency.

For traders, the spread between Canadian and U.S. yields will therefore remain one of the most important indicators to watch.

Trade Restrictions Add Another Risk

A U.S. ban on various Canadian goods imports has also taken effect.

The development adds another layer of uncertainty for Canada’s external sector.

The potential impact will depend on which industries are affected and how businesses adjust their trade flows.

For the currency market, the broader concern is whether additional trade restrictions could weaken Canadian exports or business confidence.

Any deterioration in the trade outlook could add to the pressure already coming from softer domestic growth.

Oil and the Canadian Dollar

Oil remains an important consideration for the Canadian currency because of Canada’s position as a major energy producer and exporter.

The latest GDP data showed a decline in oil and gas extraction, highlighting the importance of the energy sector to the domestic economy.

Changes in global oil prices can influence Canada’s export revenues, investment activity and overall economic outlook.

Traders will therefore continue monitoring crude prices alongside USD/CAD and broader commodity-market sentiment.

Bullish Sentiment

1. Canadian GDP still increased in August

Real GDP rose 0.2%, matching expectations.

2. Mining and retail provided support

Mining and quarrying and retail trade helped drive the August increase.

3. The Canadian dollar is already near a 12-week low

Some traders will be watching for stabilisation around current levels.

4. Oil remains an important source of external support

Higher energy prices can improve Canada’s trade and export revenues.

5. A weaker U.S. dollar could reduce pressure

Any reversal in U.S. dollar strength would ease one of the main headwinds facing the loonie.

Bearish Sentiment

1. The loonie is near its weakest level in 12 weeks

The Canadian dollar has weakened to around C$1.42 per U.S. dollar.

2. Domestic growth momentum has weakened

July GDP was essentially unchanged after three consecutive months of growth.

3. Bank of Canada rate-hold expectations remain strong

A stable Canadian policy rate could leave the loonie exposed if U.S. rates continue rising.

4. Fed rate-hike expectations are increasing

Markets are pricing in the possibility of further U.S. monetary tightening.

5. Trade restrictions add uncertainty

The U.S. ban affecting various Canadian goods creates another potential drag on Canada’s external sector.

Canadian Dollar Forecast: What Traders Are Watching Monday

The Canadian dollar begins the new week with the C$1.42 area firmly in focus.

The latest economic data points to weaker momentum, while expectations for the Bank of Canada to hold rates are limiting the currency’s domestic interest-rate support.

At the same time, markets are increasing bets on further Federal Reserve rate increases, strengthening the U.S. dollar and potentially widening the U.S.-Canada interest-rate differential.

The key question on Monday will be whether the loonie can stabilise near current levels or whether renewed dollar strength pushes USD/CAD higher.

The direction of U.S. yields, Federal Reserve expectations, oil prices and Canadian economic data will all be important.

Supply Outlook

Canada’s external position remains closely connected to commodity exports, particularly energy.

The decline in oil and gas extraction during August is therefore an important development for the domestic economy.

A sustained recovery in energy production and stronger commodity prices could provide support through higher export revenues.

Conversely, weaker production or softer commodity demand could reduce one of the important sources of external support for the Canadian dollar.

Demand Outlook

Demand for the Canadian dollar will depend heavily on international investment flows and the outlook for Canadian economic growth.

The recent slowdown in GDP momentum creates a challenge, particularly if U.S. economic performance remains stronger.

A widening interest-rate differential could encourage investors to favour U.S. assets.

For the loonie to stabilise, markets will be watching for evidence that Canadian growth is recovering or that U.S. monetary-policy expectations are becoming less aggressive.

Currency Hedger View

For businesses importing or exporting goods to and from Canada, movements in USD/CAD can have a direct impact on the effective cost of international transactions.

A weaker Canadian dollar increases the Canadian-dollar cost of U.S.-dollar-denominated imports, while exporters can see changes in the Canadian-dollar value of overseas revenues.

Businesses exposed to USD/CAD should therefore monitor the relationship between the loonie, oil prices, Canadian economic growth, U.S. Treasury yields and Federal Reserve policy expectations.

Currency Hedger helps businesses manage international currency exposure alongside changing market conditions, allowing companies to consider both the underlying transaction value and the FX component of cross-border payments.

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Coming Sessions

The start of the week will centre on the interaction between Canadian growth, U.S. monetary policy and global commodity markets.

Traders will be watching:

• USD/CAD movements
• U.S. dollar strength
• Federal Reserve rate expectations
• U.S. Treasury yields
• Bank of Canada policy expectations
• Canadian GDP and economic activity
• Oil prices
• Canadian energy production
• Canadian trade developments
• U.S.-Canada trade relations
• Global risk sentiment

A stabilisation in the U.S. dollar or stronger oil prices could provide some relief for the loonie.

If U.S. rate expectations continue to rise while Canadian growth remains subdued, the interest-rate differential could remain a major source of pressure.

Today Markets View

The Canadian dollar enters Monday trading near a 12-week low after weaker domestic growth and continued U.S. dollar strength pushed the loonie toward C$1.42 per U.S. dollar.

August GDP increased 0.2%, matching expectations, but the result came after essentially flat GDP in July and marked a weaker start to the third quarter.

The data has reinforced expectations for the Bank of Canada to hold rates, while markets are increasing bets on further Federal Reserve rate increases.

That combination is important for USD/CAD because a widening U.S.-Canada interest-rate differential can strengthen the relative appeal of U.S.-dollar assets.

The start of the week will therefore be focused on whether the Canadian dollar can stabilise or whether continued dollar strength and shifting rate expectations push it toward further weakness.

Oil prices, Canadian economic data, U.S. yields and Federal Reserve expectations will remain the key drivers.

Analysis Louis Roche – Today Markets

Currency Hedger

For businesses buying or selling internationally, currency movements can have a direct impact on the effective cost of physical commodity and commercial transactions.

Currency Hedger helps businesses manage international currency exposure alongside changing market conditions, allowing companies to consider both the underlying transaction value and the FX component of cross-border payments.

Open a Currency Hedger Account

Learn more about Currency Hedger

General market information and analysis provided by Octalas Group on behalf of Today Markets and Currency Hedger. This material is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any financial instrument.