BoC Warns Trade Tensions Could Permanently Hurt Canada’s Economy

The Bank of Canada (BoC) warned that prolonged trade tensions with the U.S. could permanently reduce Canada’s GDP, as noted in its latest policy meeting minutes. The BoC stressed that sustained trade conflicts could weaken economic activity, disrupt supply chains, raise inflation, and devalue the Canadian dollar. Some businesses were already considering relocating to the U.S., raising concerns about capital flight and competitiveness.

Governor Tiff Macklem emphasized the need to maintain the BoC’s 2% inflation target in the 2026 policy review amid trade uncertainty. He warned that broad U.S. tariffs could significantly harm Canada’s economy, leading to a permanent GDP decline. Macklem described such a scenario as a structural shift rather than a temporary shock. He also suggested the BoC may refine its monetary tools, particularly in inflation measurement and housing policy. He projected that U.S. tariffs, coupled with Canadian retaliatory measures, could nearly eliminate economic growth in 2025-26 while causing a temporary inflation spike.

Canada’s inflation edged up to 1.9% in January, driven by fuel and natural gas prices, though a temporary sales tax reprieve helped offset broader price increases. Core CPI remained within the BoC’s 1%-3% target for six months. Analysts saw a 63% chance the BoC would hold rates steady in March, though expectations could shift if U.S. tariffs proceed. The Canadian dollar weakened slightly, while bond yields climbed. The BoC’s preferred inflation measures, CPI-median and CPI-trim, rose to 2.7%, reflecting persistent price pressures.

Retail sales rose 2.5% in December, fueled by a government sales tax holiday and strong vehicle purchases. This surge supported consumer spending despite broader uncertainty. Analysts suggested it could justify a BoC pause on further rate cuts, though early January data hinted at a 0.4% sales decline, raising concerns over consumer momentum. GDP growth for Q4 2024 was projected at 1.7% annualized.

Trade tensions drove Canadian investors toward safer assets like gold and essential goods producers, such as uranium companies. With 75% of Canada’s exports going to the U.S., Trump’s tariff threats posed major risks. Sectors like financials, real estate, and energy remained relatively insulated, but trade-sensitive industries such as auto parts and steel saw stock declines. The uncertainty boosted demand for gold, supporting the TSX index, while investors also increased exposure to oil and gas firms benefiting from a weaker Canadian dollar. Analysts expected market volatility but saw investment opportunities in specific sectors.

The U.S. dollar strengthened broadly on Friday, but later pared gains as business activity dropped to a 17-month low. Weak consumer sentiment and disappointing home sales fueled expectations of Federal Reserve rate cuts. Investors awaited this week’s PCE index release for further monetary policy clarity.

U.S. consumer sentiment hit a 15-month low in February, with households worried about Trump’s tariffs reducing their purchasing power. The University of Michigan’s index fell to 64.7, while one-year inflation expectations jumped to 4.3%, the highest since 2023.

Business activity nearly stalled, with the S&P Global Composite PMI dropping to 50.4. Manufacturing saw short-term gains from stockpiling ahead of potential tariff costs, but the services sector contracted for the first time in over a year. Concerns over government policies, including trade restrictions and federal spending cuts, weighed on sentiment. Federal spending cuts led to job losses, adding to economic uncertainty.

Trump’s policies also impacted homebuilder sentiment, inflation, and financial markets. Despite rising costs, futures markets signaled higher odds of two Federal Reserve rate cuts in 2025, likely in June and October. Existing home sales fell 4.9% in January as high mortgage rates and tariffs on building materials hurt affordability.

Fiscal concerns lingered as Treasury Secretary Scott Bessent reassured markets there were no immediate plans for long-term debt issuance. However, Trump’s proposed tax cuts could add over $4 trillion to the national debt in the next decade. Meanwhile, the Federal Reserve weighed balance sheet adjustments, which could affect Treasury yields and financial conditions.

As a result, the USD/CAD exchange rate is expected to trend higher in the near term as prolonged U.S.-Canada trade tensions weigh on the Canadian economy. Additionally, investor preference for safer assets, such as gold and U.S. Treasuries, may drive further CAD depreciation. In the short term, a weaker CAD due to trade risks and economic stagnation may push USD/CAD toward higher resistance levels, with potential for volatility as markets react to tariff developments and central bank policy shifts.

Data for Technical Analysis (1H) CFD USD/CAD

Resistance : 1.4195, 1.4198, 1.4204

Support : 1.4183, 1.4180, 1.4174

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.4175 - 1.4183 is touched, but the support at 1.4183 cannot be broken, the TP may be set around 1.4195 and the SL around 1.4171, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.4195 - 1.4203, TP may be set around 1.4214 and SL around 1.4179, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.4195 - 1.4203 is touched, but the resistance 1.4195 cannot be broken, the TP may be set around 1.4180 and the SL around 1.4207, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.4175 - 1.4183, TP may be set around 1.4166 and SL around 1.4199, or up to the risk appetite.       

Pivot Points Feb 24, 2025 03:14AM GMT