Canadian Dollar: Trade War Complicates BoC Path – Standard Chartered

Amid the significant uncertainty that the trade war has cast over the economic outlook, the Bank of Canada's interest rate path is becoming unusually complex. Standard Chartered economist Dan Pan released a report stating that the bank expects the BoC to hold its current policy rate of 2.25% for a longer period, delaying its next 25-basis-point rate cut to December of this year, later than the timing generally anticipated by the market. The core rationale is that the rebound in second-quarter economic growth has reduced the need for immediate monetary policy easing.

**Stagflation Risk Puts the Central Bank in a Policy Dilemma**

The trade conflict is placing the Bank of Canada in a classic stagflation-style policy dilemma. On one hand, the impact of U.S. tariffs could dampen corporate investment and household spending, dragging on economic growth through multiplier effects, which theoretically calls for rate cuts to support the economy. On the other hand, Canada's retaliatory tariffs would push up the prices of imported goods, and if the Canadian dollar were to weaken further at this point, it would intensify imported inflationary pressures. Data shows that the BoC has previously identified trade relations as one of the biggest risks to its inflation forecast. Cutting rates to support the economy could further weaken the loonie and amplify price pressures; holding steady, however, could subject manufacturing, real estate, and indebted households to greater economic strain.

**Market Pricing Has Yet to Fully Reflect Trade War Risks**

Current FX market pricing may not yet have fully digested the fallout of a breakdown in negotiations. As of the close of Canadian markets last Friday, USD/CAD was trading near 1.3760, but this price level reflects more of the market's optimism that both sides could reach a last-minute deal. Since U.S. tariff measures only officially took effect over the weekend, the true market repricing may have only just begun. Standard Chartered's latest forecast also highlights that, under the shock of the trade war, the BoC's easing pace will be slower and more cautious than previously envisioned, with the near-term risk direction for the Canadian dollar still tilted toward depreciation.