Markets are turning to Canada’s July inflation print and a looming US Section 338 tariff deadline as near-term drivers for the Canadian dollar. TD Securities expects headline CPI to rise 0.1pp to 2.9% year-on-year, with prices up 0.4% month-on-month, while core measures are seen steady: CPI-trim/median at 1.85% y/y and 1.6% on a three-month annualised basis. Retail sales are forecast to be flat in June, undershooting earlier indications of a 0.4% increase.
Trade policy remains in focus after three weeks of talks between Canadian and US officials aimed at averting a 50% tariff on $20bn (USD) of Canadian exports. On monetary policy, TD Securities projects the Bank of Canada keeps the Overnight Rate at 2.25% through 2026, before moving back towards neutral at 2.75% in 2027 via 25bp hikes in January and March. Within activity data, stronger motor vehicle sales are expected to support the headline, while ex-autos sales are seen down 0.2% m/m and softer petrol prices are flagged as a drag.
—Implications of Trade Policy and Volatility Risks
We recommend that derivative traders brace for heightened volatility in the Canadian dollar (CAD) as we approach the critical Wednesday deadline for US Section 338 tariffs. If negotiations fail and the proposed 50% tariff on $20 billion of exports is implemented, CAD is highly likely to plunge. Looking back at the 2018 trade disputes, similar US tariff threats quickly pushed the Canadian dollar down by over 2%, suggesting that front-month USD/CAD call options are currently underpriced.
Inflation Outlook and Interest Rate Futures
At the same time, we must prepare for the upcoming July inflation print, which is expected to show headline CPI rising to 2.9% while the core rate remains anchored at 1.85%. This stable core reading will likely keep the Bank of Canada on hold at 2.25% for its September 2 policy decision. We can take advantage of this by selling premium on short-term interest rate futures, betting that rate expectations for the rest of 2026 will remain locked in.
Finally, we anticipate that June retail sales will disappoint the market by coming in flat, missing the initial flash estimates of a 0.4% increase. A drag from lower gasoline prices and weaker consumer demand will keep pressure on the currency regardless of the tariff outcome. Positioning with USD/CAD volatility strategies, such as buying straddles, allows us to capture the impending breakout from these twin domestic and trade risks.
