Canadian Dollar: CPI and US tariffs weigh on outlook – BBH

Elias Haddad of Brown Brothers Harriman anticipates Canada's July Consumer Price Index (CPI) to maintain core inflation below 2%, suggesting the Bank of Canada (BoC) may keep pausing interest rate hikes. He highlights looming 50% US tariffs on approximately USD 20 billion of Canadian imports as an additional factor, which, combined with anchored core inflation and trade friction, could lead to a reassessment of BoC rate-hike expectations and potentially weaken the Canadian dollar (CAD).

Canada's July CPI is forecast at 2.9% year-over-year (y/y) versus 2.8% in June, with core CPI (excluding food and energy) at 1.8% y/y versus 1.8% in June. Core CPI (averaging trimmed and median) is projected at 1.85% for the second consecutive month. The Bank of Canada projects headline CPI at 2.5% y/y and core CPI (average of trimmed and median) at 2.0% y/y for Q3.

If trade discussions do not result in a resolution, the United States will impose 50% tariffs on nearly $20 billion worth of Canadian imports, affecting various goods ranging from wine to hockey sticks to cement. However, energy, potash, and certain critical minerals will be exempt from the tariffs. Consequently, core inflation remaining below the BoC's 2% target and ongoing US-Canada trade tensions support the BoC's decision to continue pausing rate hikes.

This situation allows for potential adjustments downward in BoC rate hike forecasts against the CAD.