Canadian Dollar: Data and tariffs shape near-term risks – TD Securities

TD Securities’ Robert Both and Emma Lawrence highlight that markets are watching Canadian CPI and potential US Section 338 tariffs on CAD exports. They expect headline CPI at 2.9% year-on-year in July with core at 1.85%, and see retail sales flat in June. The Bank of Canada is projected to hold its Overnight Rate at 2.25% through 2026 before gradual hikes in 2027.

CPI, tariffs and BoC expectations

"The market's focus will be divided between top-tier economic data and Wednesday's deadline for Section 338 tariffs. Canadian officials have spent the last three weeks negotiating with their US counterparts to find an off-ramp before the 50% tariff on $20bn (USD) of CAD exports comes into effect."

"We look for headline CPI to firm by 0.1pp to 2.9% y/y in July as prices rise by 0.4% m/m on positive contributions from food and energy products. Seasonal tailwinds to travel related components will provide another boost, although travel services should still see a modest pullback after the sharp acceleration into the World Cup."

"CPI-trim/median are forecast to hold stable at 1.85% y/y or 1.6% on a 3m annualized basis, which would leave core CPI tracking slightly below BoC projections from the July MPR and allow the Bank to stick to its recent messaging at the next policy decision on September 2nd."

"We look for the Bank of Canada to stay on hold at 2.25% through 2026 before a return to neutral (2.75%) next year, with 25bp hikes in January and March 2027."

"We look for retail sales to hold unchanged in June for a softer performance than implied by flash estimates for a 0.4% increase. Stronger motor vehicle sales will provide a tailwind to the headline print, leaving the ex-autos measure down 0.2% m/m, with softer gasoline prices exerting a heavy drag."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)