Canada has found itself embroiled in a trade war with a giant like the US. Instead of supporting exporters, its central bank seems poised to make their lives even harder by raising the overnight rate. Let’s discuss the potential implications for the Canadian dollar, and build a trading plan for the USD/CAD.
The article covers the following subjects:
Major Takeaways
- The risk of a BoC rate hike is increasing.
- There is still no end in sight to the trade war between the US and Canada.
- Canada’s GDP growth has accelerated.
- Long positions on the USD/CAD can be opened if the price breaks through 1.383 and 1.387.
Weekly Fundamental Forecast for Canadian Dollar
The Fed remains the leader of the pack. Following Kevin Warsh’s concerns about inflation at Jackson Hole, the Bank of Canada voiced similar fears at its September meeting, while keeping the overnight rate unchanged at 2.25%. The Canadian dollar reacted much as the US dollar had before it. The USD/CAD plunged from the previously established 1.394 target for long positions. The question now is: how long will the bearish trend last?
The sense of déjà vu stems not only from the strikingly similar signals coming from the Fed and the Bank of Canada just days apart. Washington and Ottawa are also locked in a trade war with no clear end in sight—at least not before the US midterm elections. The US administration has imposed tariffs on $20 billion worth of Canadian goods, equivalent to roughly 5% of exports. Canada has responded with its own import duties, set to take effect on September 8. According to Donald Trump, the retaliation will be severe.
Canada’s Real GDP
Source: Bloomberg.
Given the experience of previous trade wars, it is hardly surprising that Canada’s GDP accelerated to 3.3% in the second quarter—the strongest economic expansion since 2023. The main catalyst was a surge in US imports. Unsurprisingly, stronger exports emerged as the key driver of the acceleration in economic growth.
The pickup in economic activity has given the Bank of Canada greater confidence. The regulator said the new US tariffs would have only a negligible impact on GDP, while highlighting the more pressing threat of inflation, which remains stuck at 3%. According to Tiff Macklem, the conflict in the Middle East poses a greater threat than the trade war between Washington and Ottawa. The longer the conflict persists, the greater the risk that higher energy prices will spill over into core inflation through second-round effects.
BoC Overnight Rate
Source: Bloomberg.
The central bank governor’s remarks were perceived as hawkish. Combined with a decline in US Treasury yields, this helped accelerate the rise in the USD/CAD. Although the overnight rate remained unchanged for the seventh consecutive BoC meeting, the derivatives market is no longer convinced that the pause will last. Markets are now pricing in at least one rate hike by the end of 2026 and as many as three by June 2027.
The negative impact of the trade war with the US has yet to fully materialize. This is particularly concerning given that the conflict appears to be on the verge of escalation. Against this backdrop, expectations for aggressive monetary tightening by the Bank of Canada look increasingly questionable. The markets are clearly getting ahead of themselves. Sooner or later, that haste is likely to come back to haunt the loonie.
Weekly USDCAD Trading Plan
The USD/CAD will react to the Canadian and US employment data for August. That said, if the labor-market reports from both countries come in broadly as expected, they could provide a basis for buying the pair if it breaks through the resistance levels at 1.383 and 1.387.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCAD in real time mode
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