Last Friday's data showed that Canada's second quarter GDP annualized quarterly rate was 2.1%, higher than the widely expected 1.8% by economists and the 1.5% forecast by the Bank of Canada. On that day, the Canadian dollar became the best performing G10 currency.

However, the details of the GDP report are not satisfactory, implying that the central bank will have to further cut interest rates significantly, and also suggesting that the current short-term rise of the Canadian dollar will have its limitations.

Canada's seasonally adjusted GDP rate for July was 0%, lower than June's 0.2%. Economists say that the GDP data for the third quarter is far below the Bank of Canada's forecast.

Randall Bartlett, Senior Director of Canadian Economy at Desjardins Bank, said, "Upon closer inspection, Canada's growth engine seems to be stalling." He also stated that his tracking of the annualized growth rate of real GDP in the third quarter is currently between 1.0% and 1.5%. This is far below the 2.8% predicted by the Bank of Canada in its July 2024 monetary policy report.

Economic recovery seems unlikely. Matthieu Arseneau, an economist at the National Bank of Canada (NBC), said, "Despite the start of interest rate cuts, households renewing their mortgages continue to face significant impact on interest payments. Canada's interest rates are still too strict

The National Bank of Canada believes that the Bank of Canada will significantly reduce interest rates in the coming months, including a 25 basis point cut on September 4th.

Despite the prospect of further interest rate cuts, the Canadian dollar has performed well in the short term: the pound against the Canadian dollar has failed to hold the support level of 1.78 and has now fallen continuously to around 1.7715.

The strength of the Canadian dollar is more evident elsewhere, with the euro falling to around 1.4915 against the Canadian dollar for seven consecutive days in August.

The recovery of the Canadian dollar will be challenged by another interest rate cut this week, and the guidance from the Bank of Canada should imply further interest rate cuts.

The GDP data released last Friday showed that it is necessary to further cut interest rates as corporate profits are difficult to recover.

Despite the bleak domestic economic situation in Canada, the prospect of the Federal Reserve cutting interest rates in September has boosted the Canadian dollar. This has boosted global investor confidence and raised expectations that US economic support will boost Canada's prospects.

The market has also established significant "short" positions in the Canadian dollar, betting that the dollar will continue to decline. The selling of these positions can explain the recent excellent performance.

Daily chart of USD/CAD exchange rate