Canada’s July CPI is expected to keep underlying inflation under 2%, with headline CPI seen at 2.9% y/y versus 2.8% in June. Core CPI excluding food and energy is forecast at 1.8% y/y, unchanged from June, while the average of trim and median measures is projected at 1.85% for a second straight month. The Bank of Canada’s Q3 projections sit at 2.5% y/y for headline CPI and 2.0% y/y for the trim-median average.
Separately, the US is set to impose 50% tariffs on nearly $20bn of Canadian imports, equivalent to 0.85% of Canada’s GDP, unless trade talks produce a breakthrough. The duties would cover goods ranging from wine and hockey sticks to cement, but exclude energy, potash, Section 232-covered products, and items such as fish or critical minerals. With core inflation below the BoC’s 2% target, markets currently price 65bps of rate hikes over the next twelve months, a path that could be revised lower, putting pressure on CAD.
Trade Recommendation: Short CAD and Buy USD/CAD Calls
We recommend that derivative traders short the Canadian dollar (CAD) or buy USD/CAD call options ahead of this Wednesday’s tariff deadline. With the U.S. poised to slap 50% tariffs on $20 billion of Canadian goods, the CAD is highly vulnerable to a sudden, sharp selloff. Historically, during similar trade disputes in 2018, the Canadian dollar plunged by over 5% against the greenback in a matter of weeks.
Macro Drivers For Bullish USD/CAD Strategies
Today’s CPI data is expected to show core inflation safely anchored below 2%, which will force the Bank of Canada to keep interest rates on hold. This setup makes short-term Canadian interest rate futures an attractive buy as the market prices out any remaining rate-hike bets. We can look at recent economic data, such as Canada’s flat GDP growth and rising unemployment rate of 6.4%, to confirm that the domestic economy cannot support higher borrowing costs.
To exploit this expected volatility, we suggest buying out-of-the-money USD/CAD call options expiring in one month. Currently, USD/CAD implied volatility is hovering near a multi-month low of 5.8%, making these option contracts relatively cheap to purchase. If the tariff threat materializes on Wednesday, the USD/CAD exchange rate could easily break past its key resistance level of 1.3800.
