Canadian Dollar Leads Gains as GDP Beats, Commodities Advance

  • USD suffers amid lackluster inflation data, Treasury jawboning
  • Treasury secretary says weak USD ‘somewhat better’ for trade

The Canadian dollar was the best performer among major currencies Thursday amid better-than-expected economic growth, gains in gold and crude oil and a shift forward in expectations for the next Bank of Canada rate increase.

While the greenback declined after a weak inflation inflation report and jawboning from Treasury Secretary Steven Mnuchin, the loonie climbed more than 1 percent versus its American counterpart and advanced against all of its G-10 peers. Traders focused on stronger-than-expected Canada second-quarter economic growth and priced in a greater chance that the nation’s central bank will hike rates at its meeting next week.

  • The Bloomberg Dollar Spot index dropped ~0.2% on the day after economic data and comments from Mnuchin weighed on the currency. The decline was set to push the index to its six straight monthly drop -- the longest streak since 2007. A strong gain against the Mexican peso amid Nafta uncertainty helped cushion the index’s fall. The dollar was down against all G-10 peers except the kiwi
  • Mnuchin said that while the short-term direction of the dollar doesn’t concern him, a weaker dollar is “somewhat better” for U.S. trade. Earlier, PCE data showed August core inflation at 1.4% y/y, while pending home sales for July declined 0.8% m/m vs expectations for a 0.3% advance
    • The USD slide on Mnuchin’s comments was also driven by concern that tax reform could involve an outright tax cut, says Greg Anderson, head of FX strategy at Bank of Montreal; “The market views a deficit-neutral tax reform as USD-positive but an outright tax cut would be interpreted by global FX markets as irresponsible and USD-negative”
  • CAD strengthened to less than 1.2500 vs the dollar and traded near a session low of 1.2477. Canada’s economy grew 4.5% in 2Q -- its strongest pace in nearly six years -- beating expectations for 3.7% growth; crude oil prices also gained as much as 3.3%, buoying the commodity-sensitive currency, while spot gold traded above $1,320
    • BOC September rate hikes odds increased to ~40% from ~25% on Wednesday
    • Eyes will now be on the 1.2414 July low ahead of the Sept. 6 BOC decision
  • EUR/USD recovered gains lost earlier in the session and was on track to end the session up ~0.2% around 1.1900. The common currency earlier lost as much as 0.5% after Reuters reported that ECB policy makers were worried about the euro’s strength
    • Daily high of 1.1913 coincided with resistance from Aug. 2 high 1.1910, breakout level post-Jackson Hole
  • USD/JPY traded below 110.00 near a session low of 109.88; yen rose as price of gold in yen terms hit a two-year high
    • Support from large Friday option expiry at 109.90; offers are in range of 110.75

— With assistance by Robert Fullem

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