Canada posts a stronger second quarter

CAD: Canada’s rebound buries recession fears

Canada’s economy expanded by an annualized 3.3% in the second quarter, broadly matching the 3.4% forecast. Real GDP rose 0.8% from the previous quarter, while GDP per capita increased 1.0% as the population declined. More importantly, first-quarter growth was revised into positive territory, overturning the initial contraction. That revision invalidates the technical recession debate that gained traction a few months ago.

Exports led the rebound, rising 3.6% at their fastest pace in more than three years. Auto shipments surged as domestic production recovered, while household spending, residential construction and business investment also strengthened. A large inventory drawdown cut 1.3 percentage points from growth, which suggests final demand was firmer than the headline figure. Household disposable income rose 2.1%, lifting the saving rate to 3.7%.

The economy therefore entered the summer on stronger footing than previously thought, supported by both external and domestic demand. However, Statistics Canada’s early estimate points to no growth in July. The outlook is also clouded by the tariff dispute, which could weigh on exports, investment and business confidence. Canada may have avoided a technical recession, but sustaining the second-quarter pace will be difficult.

Canadian dollar

The Canadian dollar weakened after a solid GDP report, with USD/CAD touching 1.3860 shortly after the release. The loonie found little support, as the wide US-Canada rate gap and a flat July GDP estimate kept markets focused on the outlook.

Trade policy now poses the larger risk for CAD. New US tariffs target several industries that powered the second-quarter export surge, while planned Canadian countermeasures raise the threat of further escalation. USD/CAD remains below resistance at 1.3880 to 1.3900, but a sustained break could open a move toward 1.40. A return below 1.3760 would likely require progress in trade negotiations or a broader decline in the US dollar. Ending the week, markets will pay close attention to Kevin Warsh speech at Jackson hole.

USD: Dollar steady ahead of Warsh

The US dollar finished near 99.24 as traders wait for Kevin Warsh’s Jackson Hole speech. Initial jobless claims fell to 203,000, while continuing claims dropped to 1.78 million. Combined with firmer PCE inflation, the data reinforced the case for tighter Fed policy. Fedspeak from Schmid and Hammack added to the hawkish tone, while Collins offered a more cautious view. Treasury yields rose, with the 10-year closing near 4.67% and the 30-year approaching its highest level since 2007.

Hormuz developments pulled markets in both directions. Talks involving Iran and Qatar raised hopes for a temporary shipping corridor and joint mine clearing, while regional crude flows continued to recover. Oil initially fell as the diplomatic push eased supply concerns. However, another tanker attack, fresh sanctions and resistance from Washington exposed the limits of that progress. WTI reversed higher toward $84, restoring part of the inflation premium that had faded earlier in the session.

DXY has recovered about half of the losses triggered by Bessent’s expanded Treasury buybacks. Strong labor data and persistent inflation keep the probability of a September rate increase near 42%, but Warsh now faces the communication test. A hawkish signal could lift DXY toward 99.50 and then 100.00. A vague or cautious speech could send the index back toward 98.80, with 97.96 below that. If Warsh declines to clarify the policy path, payrolls and CPI will decide the dollar’s next move.

MXN: Strong month for the Mexican Peso

USD/MXN is trading near 16.95, close to the peso’s strongest level since May 2024 despite sharp swings across emerging-market assets. Mexico’s carry advantage remains the main anchor, with the two-year yield premium over the US near 339 basis points and Banxico showing little urgency to restart its easing cycle. The central bank also raised its 2026 GDP forecast to 1.5% from 1.1%, while retaining its view that inflation will return to the 3% target by Q4 2027. That combination keeps investors paid to hold pesos while giving the trade firmer macro support.

Mexico’s external position adds another layer of resilience. International reserves rose to $258.6bn, while strong demand at recent government debt auctions confirmed that market access remains healthy. Progress toward an interim framework for shipping through the Strait of Hormuz has also helped risk appetite and pulled oil back from recent highs. However, the latest US PCE data revived speculation about another Fed hike and briefly reversed the peso’s gains. The Pemex fiscal burden and sticky services inflation remain the main domestic constraints.

USD/MXN is consolidating above the August low near 16.92, with repeated moves toward 17.00 failing to develop into a broader dollar recovery. A sustained break above 17.00 would weaken the peso’s momentum and expose 17.10–17.20, while a move below 16.90 would bring 16.80 into view. Low implied volatility suggests options markets are not positioned for an imminent breakout, although crowded peso exposure leaves room for a quick reversal if US yields rise or geopolitical tensions worsen. For now, carry, stronger growth expectations and a solid external buffer continue to favour MXN. The next move will depend on whether the Fed repricing gains traction or the dollar resumes its broader retreat.

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Calendar: August 24 – 28

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.