CAD: Tariffs recede into the background for the market, but does the same apply for the BoC? – Commerzbank

The tariffs no longer seem to be a major issue for the CAD, especially since the US administration has exempted Canada from the reciprocal tariffs. In fact, USD/CAD is trading at levels we have not seen since the US election - although much of the move lower was also driven by USD weakness, Commerzbank's FX analyst Michael Pfister notes.

Tariff risks still linger for BoC

"We were already cautious during the period of CAD weakness and now, in the opposite direction, we feel compelled to repeat our warnings. We would be cautious about assuming that the tariff issue has been resolved for Canada. At the moment, no one can say for sure what Donald Trump's next target will be. And similar to the phase when Canada was somewhat the main target and we repeatedly stressed that Trump had probably not forgotten other countries, he has not forgotten Canada either, even if the focus is on China for the time being."

"Nowhere else is the impact of the new US trade policy as pronounced as in Canada. Although the Canadian real economy was showing tentative signs of recovery towards the end of last year, since Donald Trump took office (as in the US), sentiment indicators have collapsed (see bottom left chart). And we have repeatedly pointed out here that the labour market is not experiencing particularly good times."

"Whether the BoC cuts rates again today is not so important. What is more important is whether it hints at further rate cuts in the coming months and how strongly it emphasises the risks to the real economy. We would not be quite as sure as the market that the BoC has already forgotten about the impact of the US tariffs. Accordingly, we would not be surprised if the BoC sounds rather dovish today, which would likely weigh on the CAD."