The Canadian Dollar (CAD) has come under significant pressure following the announcement of new US tariffs and softer-than-expected inflation data in Canada. Societe Generale strategists note that the CAD's rebound from 1.4250 toward 1.40 against the US Dollar (USD) has stalled, with the failure to reclaim the 50-day moving average around 1.3991 and the imposition of new US tariffs on Canadian goods complicating the mean-reversion process [1]. At the time of reporting, USD/CAD trades around 1.4084, marking its second consecutive day of gains [2].
US President Donald Trump announced a 50% tariff on nearly $20 billion worth of Canadian imports, which is equivalent to approximately 0.85% of Canada’s Gross Domestic Product (GDP). These tariffs are scheduled to take effect on August 19 [2]. Canadian Prime Minister Mark Carney described the tariffs as a “direct violation” of the USMCA but stated that Ottawa remains committed to negotiations [2]. Societe Generale also highlights that the 2-year US Treasury/Canadian Government bond spread widened by 6 basis points to 136 basis points, further weighing on the CAD [1].
On the economic front, headline CPI in Canada slowed to 2.8% year-over-year in June, with core inflation dipping to 1.8%, the lowest since December 2020 [1]. The Bank of Canada (BoC) indicated that this data reassures them that spillovers from energy to supply chains and non-energy goods are contained, and they expect inflation to return to around 2% in early 2027 [1]. Money markets currently price just 18 basis points of tightening in the next six months, which is lower than the ECB (+45bp), Fed (+42bp), and BoE (+41bp) [1]. The softer inflation data supports the BoC’s steady policy stance and reduces the likelihood of an interest rate hike, adding to the CAD’s near-term headwinds [2].
Geopolitical tensions in the Middle East have kept the US Dollar in demand as a safe haven, with the US Dollar Index (DXY) trading around 101.10, extending gains for a fourth consecutive day [2]. Oil prices, as measured by West Texas Intermediate (WTI), have rebounded to $84.32 per barrel, up nearly 2.5% on the day, which could provide some support to the commodity-linked CAD and limit further upside in USD/CAD [2].
Technically, Societe Generale notes that a violation of 1.3970 could open a return to May lows around 1.3870/1.3850, while last week's high at 1.4150/1.4175 serves as interim resistance [1]. The CAD was the strongest against the British Pound among major currencies today, but overall, it remains under pressure against the USD [2].
CONCLUSION
The Canadian Dollar is facing strong headwinds from newly announced US tariffs and weaker-than-expected inflation data, both of which have stalled its recent rebound. While higher oil prices may offer some support, the overall market sentiment remains negative for the CAD in the near term. Ongoing negotiations and geopolitical developments will be key factors to watch.