Canadian Dollar: Tariffs and soft CPI pressure Loonie – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes the Canadian Dollar (CAD) is underperforming other high-beta currencies after the Trump administration announced a 50% tariff on nearly $20 billion of Canadian imports, excluding energy and some key goods. At the same time, Canada’s June inflation cooled more than expected, with core measures below the Bank of Canada’s (BoC) 2% target, supporting an extended BoC pause and downside adjustment in rate hike bets against CAD.

Trade shock and inflation drag CAD

"CAD is underperforming other high-beta currencies. The Trump administration announced yesterday a 50% tariff on nearly $20 billion in imports from Canada (0.85% of Canada’s GDP), which will take effect on August 19."

"The tariff would apply to a range of products from wine to hockey sticks to cement. The tariff will not apply to energy, potash, products subject to tariffs under Section 232, and other goods like fish or critical minerals."

"Meanwhile, Canada inflation cooled more than expected in June. Headline CPI printed at 2.8% y/y (consensus: 2.9%) vs. 3.2% in May on lower gasoline prices. The policy-relevant core CPI (average of trim and median) dropped to 1.85% y/y (consensus: 2.05%) vs. 2.05% in May, matching the September 2020 low. Core CPI ex. food & energy was marginally hotter than anticipated at 1.8% y/y (consensus: 1.7%) vs. 1.6% in May."

"Worsening US-Canada trade dispute and core inflation running below the Bank of Canada’s (BoC) 2% target, support an extended BoC pause. As such, there is room for BoC rate hikes bets (50bps in the next twelve months) to adjust lower against CAD."