Canadian dollar posts biggest monthly loss since October as interest rate outlooks diverge

The Canadian dollar CADUSD weakened to an 11-day low against its broadly stronger US counterpart on Tuesday as slower-than-expected domestic economic growth supported bets the Bank of Canada would cut rates more deeply than the Federal Reserve.

Canada’s gross domestic product (GDP) rose 0.2 per cent in February, Statistics Canada said, missing estimates for a gain of 0.3 per cent, while a preliminary estimate for March showed that GDP was “essentially unchanged.”

The economy is likely to have expanded at a 2.5 per cent annualized rate in the first quarter, Canada’s national statistics agency added. That’s the fastest growth rate since the first quarter of 2023 but slightly slower than the BoC’s latest forecast of 2.8 per cent.

“Lower expected growth in Canada and a more rate sensitive economy is likely to force BoC policy to diverge with the Fed in a meaningful way over the next few quarters,” said Geoff Phipps, a trading Strategist and portfolio manager at Picton Mahoney.

Money markets see a roughly 60 per cent chance that the Canadian central bank begins cutting its benchmark interest rate in June and expect 54 basis points of easing in total by December, compared to 32 basis points from the Fed.

The Canadian dollar was trading 0.7 per cent lower at 1.3750 per US dollar, or 72.73 US cents, after earlier touching its weakest level since April 19 at 1.3760. For April, the loonie was down 1.5 per cent, its biggest monthly decline since October.

The move lower for the currency came as US labor cost data boosted the US dollar against a basket of major currencies and rising US crude production weighed on oil, one of Canada’s major exports. US crude futures were down 1.1 per cent at $81.73 a barrel.

Canadian government bond yields moved higher across the curve, tracking moves in US Treasuries. The 10-year was up 4.7 basis points at 3.808 per cent.