Amid all the tariff news and uncertainty, we get two major central bank meetings over the next couple of days. It is generally a tough spot for rate setters at the moment, as they wait for tariffs to impact economic data. Inflation is expected to rise or at least stay elevated, while growth should suffer on the shifting economic narrative and increased turmoil from US policy announcements.
BoC decision on a knife edge
The Bank of Canada announces policy today, having cut rates by 225bps already to 2.75%. This decision is a close call with bets of more policy easing cooling in recent days, with the chances of a rate cut today roughly at around 40%.
The overnight rate is now in the centre of the neutral rate estimate, according to Governor Macklem between 2.25% and 3.25%. However, the latest labour market report was one of concern, while inflation surprised to the downside yesterday. This meeting will be accompanied by the Monetary Policy Report, which will incorporate the latest growth and inflation forecasts from the BoC, and its latest estimate of the output gap and neutral rate.
The BoC dropped forward guidance earlier in the year due to the uncertainties ahead. Although the global risk-off tone has tempered following the pause, there is still huge uncertainty ahead, which could perhaps argue for a pause in the bank rate with the BoC now at the neutral rate.
Current Canada tariffs
Crucially, there has been a USMCA good exemption from US tariffs, though the economy is still subject to 25% levies in relation to the inflow of fentanyl into the US. These tariffs are only implemented on goods that are non-USMCA compliant. President Trump has also said the 25% tariffs would drop to 12% if there were improvements in the flow of fentanyl. Tariffs on autos, steel, and aluminium do remain. Trump has since announced a 90-day pause for reciprocal tariffs, but given Canada was not subject to the reciprocal tariffs, the tariffs have not changed.
Market reaction
CAD has been mid-pack in the majors in April, outperforming its commodity-dollar peers but underperforming the European safe havens and yen. The loonie initially whipsawed on President Trump’s first tariff announcement regarding Canada and Mexico levies as the major hit multi-decade highs. But prices quickly reverted back to the recent range when one-month delays were declared. More recently, the CAD been pulled along with the broader sell-off in the USD and notched up another decent weekly gain—its fourth on the trot and the largest since late 2022. US/Canada spreads have compressed somewhat amid all the volatility in markets, but the weak USD tone is the primary driver of the CAD’s rise. Resistance sits at the 200-day simple moving average at 1.40 and the recent low is 1.3827.