First, United States Federal Reserve chair Jerome Powell on Wednesday showed no inclination to cut interest rates for the foreseeable future, while the Bank of Canada said the door is “open” to paring back their policy rate. Then last night, U.S. President Donald Trump upped the pressure by hiking tariffs on Canadian goods to 35 per cent.
The increased tariff rate came into effect today on all goods not covered by the Canada-U.S.-Mexico Agreement (CUSMA). Following Trump’s announcement, the loonie fell nearly half a per cent, nearing 72 U.S. cents, but was regaining some of that lost ground in early trading.
“It (the Canadian dollar) is now recovering territory as traders take a more nuanced view on the longer term economic effects,” Karl Schamotta, chief market strategist at Corpay Inc., said in a note late Thursday, adding that “currency markets are reacting with remarkable aplomb, suggesting that tonight’s actions were largely priced in.”
Aug. 1 was Trump’s deadline for Canada and the U.S. to reach a trade deal, but the U.S. president signed the executive order Thursday night to slap Canada with the increased duties.
Meanwhile, a potentially widening interest rate gap between the central banks rates in the U.S. and Canada has clipped the Canadian dollar’s wings.
“We think Powell’s press conference performance set a very high bar for cutting in September,” analysts at currency specialist MonFX said in a note, adding “that had been the market base case ahead of (Wednesday’s) event.”
In the wake of the Fed’s announcement and Powell’s ensuing press conference, markets trimmed their bets for a rate cut in September to only 10 basis points — which means no cut — and to 35 basis points by year-end, meaning one cut is still in the cards for 2025.
MonFX is among those currency houses that think the Fed is done cutting for the year if the unemployment rate holds and signs of inflation start to percolate.
With expectations of rate cuts evaporating, “the (U.S. dollar) response was swift, broad and brutal, sending the DXY (U.S. dollar index) to its highest level since late May,” Shaun Osborne, chief FX strategist, and Eric Theoret, FX strategist, at the Bank of Nova Scotia, said in a note.
The Canadian dollar fell nearly half a U.S. cent on Wednesday after the two central bank announcements. On Thursday, the loonie was one of only two major G10 currencies to post declines against the U.S. dollar. The other was the Japanese yen.
More broadly, the loonie is down 2.2 per cent from its 2025 closing high on June 16 of 73.7 U.S. cents. The decline has partly coincided with the rise of the U.S. dollar index, which is up 1.1 per cent since then.
“The Canadian dollar is suffering as policy rate expectations against the U.S. diverge, and as traders brace for more negativity from south of the border,” Schamotta said in an earlier note.
Schamotta’s “short-term call” is for the Canadian dollar to fall to 71.9 U.S. cents.
Osborne and Theoret said risks related to trade and what they mean for the Bank of Canada’s policy rate pushed the Canadian dollar to hit lows not seen since late May, with the pair noting that the tone of central bank announcements from this week has delivered a blow to the (Canadian dollar’s) fundamentals.”
The Scotiabank team has pencilled in a fair value — spot assessment for the loonie of 72.9 U.S. cents.
“Looking forward, we expect that nuances in (Bank of Canada)/Fed rate expectations will become increasingly impactful on the (U.S. dollar/Canadian dollar),” Jeremy Stretch, chief international strategist at Canadian Imperial Bank of Commerce, said in a note. “We expect immediate currency performance to remain a function of interest rate spreads, albeit we expect an increased degree of sensitivity to changes in (Bank of Canada) expectations.”
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Canada’s economy is on track to outperform expectations in the second quarter even though it contracted in May, Statistics Canada said on Thursday.
On a monthly basis, gross domestic product fell by 0.1 per cent in May, the same as in April. But Statistics Canada said in its flash estimate for June that the economy grew by 0.1 per cent, driven by increases in retail and wholesale trade, which would put annualized growth for the quarter at 0.1 per cent. — Jordan Gowling, Financial Post
Today’s Data: Canada’s S&P Global Manufacturing PMI, the U.S. Labor Department releases jobs numbers for June.
Earnings: Fortis Inc., Enbridge Inc., Magna International Inc., TransAlta Corp., AltaGas Ltd., Imperial Oil Ltd., Brookfield Renewable Partners, Keg Royalties Income Fund
Financial Post
If you accidentally over-contribute to your tax-free savings account (TFSA), you will face the dreaded over-contribution penalty tax. But what if by the time you realize that you over-contributed, the fair market value of the investments inside your TFSA has plummeted to such an extent that it’s below the value of the over-contribution you need to withdraw? Find out what happened to this taxpayer and why a federal court judge is frustrated with this “perpetual tax trap.” Read here.
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Today’s Posthaste was written by Gigi Suhanic with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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