Elias Haddad of Brown Brothers Harriman (BBH) observes that following the Trump administration's announcement of a 50% tax on over $20 billion in Canadian imports, excluding energy and certain essential products, the Canadian dollar (CAD) is underperforming other high-beta currencies. The Bank of Canada's (BoC) extended pause and downward adjustment in rate increase bets against CAD were supported by Canada's June inflation cooling more than anticipated, with core measures below the BoC's 2% objective.
Inflation and trade shock hurt CAD.
"Compared to other high-beta currencies, CAD is performing poorly. A 50% duty on about $20 billion in Canadian imports, or 0.85% of Canada's GDP, was announced by the Trump administration yesterday and will go into effect on August 19.
"A variety of goods, including wine, hockey sticks, and cement, would be subject to the levy. Energy, potash, goods covered by Section 232 tariffs, and other items like fish or essential minerals are exempt from the tariff.
In the meantime, June's inflation in Canada decreased more than anticipated. Due to decreasing gas costs, the headline CPI printed at 2.8% year over year (consensus: 2.9%) as opposed to 3.2% in May. The policy-relevant core CPI (average of trim and median) fell to the September 2020 low of 1.85% y/y (consensus: 2.05%) from 2.05% in May. At 1.8% year over year (consensus: 1.7%) compared to 1.6% in May, the core CPI excluding food and energy was somewhat higher than expected.
"An extended Bank of Canada (BoC) pause is supported by a worsening US-Canada trade spat and core inflation below the BoC's 2% target. As a result, there is potential for bets on BoC rate increases (50bps over the next 12 months) to decrease in relation to CAD.
Inflation and trade shock hurt CAD.
"Compared to other high-beta currencies, CAD is performing poorly. A 50% duty on about $20 billion in Canadian imports, or 0.85% of Canada's GDP, was announced by the Trump administration yesterday and will go into effect on August 19.
"A variety of goods, including wine, hockey sticks, and cement, would be subject to the levy. Energy, potash, goods covered by Section 232 tariffs, and other items like fish or essential minerals are exempt from the tariff.
In the meantime, June's inflation in Canada decreased more than anticipated. Due to decreasing gas costs, the headline CPI printed at 2.8% year over year (consensus: 2.9%) as opposed to 3.2% in May. The policy-relevant core CPI (average of trim and median) fell to the September 2020 low of 1.85% y/y (consensus: 2.05%) from 2.05% in May. At 1.8% year over year (consensus: 1.7%) compared to 1.6% in May, the core CPI excluding food and energy was somewhat higher than expected.
"An extended Bank of Canada (BoC) pause is supported by a worsening US-Canada trade spat and core inflation below the BoC's 2% target. As a result, there is potential for bets on BoC rate increases (50bps over the next 12 months) to decrease in relation to CAD.
