The Bank of Canada’s Q2 Business Outlook Survey indicates that the effects of tariffs on firms’ outlooks are less severe compared to Q1. The Business Survey Indicator worsened slightly, moving from -2.12 in Q1 to -2.42 in Q2. Firms express decreased concern over worst-case tariff scenarios, but tariffs and uncertainty still greatly affect their outlooks.
Investment And Employment Plans
Many firms plan to maintain current staffing and restrict investments to maintenance over the next year. Export-focused businesses foresee fewer worst-case tariff incidents than in Q1. A consistent 23% of firms predict inflation above 3% for the next two years. Labour costs are expected to decrease for 43% of firms, whereas 9% foresee an increase.
Consumers’ five-year inflation expectations rose slightly to 3.45% from 3.39% in Q1. Sales declines were reported by 24% of firms, a decrease from 28% in Q1, while 28% anticipate a recession in Canada, down from 32%. The future sales indicator balance dropped from +22 in Q1 to -6. The USDCAD exchange rate experienced volatility but remains above and below the 200-hour moving average. The next target is the 38.2% retracement level at 1.36902, with further selling potential below this point.
The business outlook survey paints a mixed picture, with firms less fearful but also not planning to invest or hire aggressively. We see this creating an opening for derivative traders favoring a stronger Canadian dollar. The technical breakdown below the 200-hour moving average noted in the report provides a clear signal to act on.
Macroeconomic Factors
We believe this bearish USDCAD view is further supported by recent macroeconomic data. For instance, Canada’s labor market showed surprising strength by adding 90,400 jobs in April 2024, far exceeding forecasts. This robust employment may limit the central bank’s ability to cut interest rates soon, supporting the currency.
Although survey participants see elevated inflation, Canada’s actual annual inflation rate slowed to 2.7% in April, giving the central bank some flexibility. This contrasts with the situation in the United States, where persistent price pressures remain a primary concern for their monetary policymakers. This policy divergence is a key factor that we think will push the currency pair lower.
Given this outlook, we are positioning through derivatives for further downside in the USDCAD. This could involve buying put options or shorting futures contracts, targeting the 38.2% retracement level around 1.3690. The key is using the 200-hour moving average near 1.3785 as a strict stop-loss level, just as Michalowski suggests.
Historically, major currency levels that break often see a retest before a larger move continues. We should therefore anticipate potential choppy price action and use any rallies back toward that critical moving average as an opportunity to enter short positions. A sustained move back above that level would invalidate our immediate bearish thesis.
