The USD/CAD pair was showing an upward trend on Monday despite the overall weakening of the US dollar. This price movement is attributed to the release of weak Canadian economic growth data at the end of last week. However, at the time of that release, USD/CAD traders were focused on another piece of news. Canada stayed in the shadow of the Core PCE Index, which was interpreted negatively for the US dollar. As a result, the pair declined actively last week amid broad-based weakness in the US dollar. On Monday, however, market participants are reacting to the mixed Canadian GDP report.

All components of this report fell within the "red zone." Both the monthly and quarterly headline figures fell short of expectations. For example, GDP in June declined by 0.1% m/m, following a similar drop the previous month. Most analysts had forecasted 0.1% growth. On a yearly basis, the Canadian economy grew by just 0.9% in June, after expanding by 1.2% in May (forecast: +1.3%).

As for the quarterly figures, a similar picture emerges. For the first time since Q3 2023, this metric turned negative. GDP shrank by 1.6% y/y (forecast: -0.6%). This is the weakest print in four years: in Q2 2021, Canada's economy contracted by 3.2%.

Let's break down the reasons behind such weak results.

First, exports fell significantly in Q2. The volume dropped by 7.5%—the most significant decrease in the past five years. The drop was mainly due to the introduction of US tariffs (especially in the auto, steel, and aluminum sectors).

Second, business investment declined. The report shows that business investment (particularly in machinery and equipment) fell by 0.6%—the first such decrease since the pandemic began.

Third, output dropped in goods-producing industries (which make up roughly a quarter of the country's GDP).

However, there were positive factors that softened the blow. Chief among them was domestic demand, which rose by 3.5%. Notably, private investment in housing increased by 6.3%, household consumption rose by 4.5%, and government spending grew by 5.1%.

One more important point: Preliminary estimates indicate that GDP grew by 0.1% m/m in July—suggesting potential stabilization in Q3.

It's worth noting that most analysts didn't sound the alarm over this "red-inked" report. There are several reasons for this:

• First, the June and quarterly contraction was "export-led." It doesn't signal a full-blown recession. There's no clear sign of contraction in other sectors; internal demand remains "comfortingly" resilient.
• Second, a monthly GDP decline doesn't meet the official recession criterion. In Canada (as in most developed economies), recession is typically defined as two consecutive quarterly GDP declines, not month-to-month drops.
• Third, strong internal demand is encouraging, though questions remain about its sustainability.
• Fourth, the intrigue around a Bank of Canada rate cut at its September meeting persists. Friday's release boosted the dovish sentiment, but the final decision will depend on other reports. For example, key Canadian labor market data is released on Friday, September 5. Forecasts suggest unemployment will rise again (to 7.0%), and employment will grow by only 9,000. Such weak numbers would increase pressure on the loonie as the odds of a rate cut in September rise.
• On September 16—just a day before the Bank of Canada meeting—key inflation data will be released. In July, the headline CPI slowed to 1.7% year-over-year (y/y), after climbing to 1.9% the previous month, and core inflation remained steady at 2.6% (where it had been for three months). If inflation slows in August (amid a cooling labor market), the probability of a rate cut will approach 100%.
• If, however, the above reports come out "green," the Bank of Canada will likely remain on hold despite weak GDP data for June and Q2.

All this suggests that Friday's report is unlikely to reverse the USD/CAD trend—the current price increase is more likely a correction. Please note that on Monday, the US and Canadian markets were closed in observance of Labor Day.

In other words, considering longs on USD/CAD now is not advisable. In my view, the pair will continue to follow the greenback, which is under pressure from growing dovish expectations for further Federal Reserve moves (markets are nearly certain the Fed will cut rates twice by year-end, with the first cut likely this month).

From a technical perspective, on the H4 chart, USD/CAD is testing the resistance level at 1.3760 (the midline of the Bollinger Bands). If buyers fail to breach this barrier (i.e., if the upward impulse fizzles out in this area), selling will again be relevant. The first (and so far main) downside target is 1.3700 (lower Bollinger Band on H4 and D1).