Canadian Dollar: Trade war complicates BoC path

The Canadian Dollar faces a complicated outlook as stronger domestic growth collides with increasing trade tensions between Canada and the United States.

Standard Chartered economist Dan Pan expects the Bank of Canada to keep its policy rate unchanged at 2.25% for now and delay a potential 25-basis-point cut until December.

## BoC expected to hold rates at 2.25%

Standard Chartered believes the Bank of Canada has less reason to ease monetary policy immediately after Canada's economy showed a rebound in second-quarter growth.

Stronger economic activity gives policymakers more time to assess inflation, employment and the impact of new tariffs before making another interest-rate move.

The bank therefore expects the BoC to leave rates unchanged in the near term and postpone a 25-basis-point reduction until December.

## Stronger growth reduces need for immediate easing

The improvement in second-quarter growth has reduced concerns that the Canadian economy requires urgent monetary support.

When economic activity remains resilient, central banks generally have more flexibility to keep interest rates unchanged while monitoring incoming data.

This is especially important because the Bank of Canada must balance weaker growth risks against the possibility that tariffs could also increase inflation.

## U.S. tariffs create downside risks

Recent trade tensions with the United States remain one of the biggest risks to Canada's economic outlook.

New tariffs could weaken exports, raise costs for Canadian companies and reduce business investment if the dispute continues for an extended period.

Because the United States is Canada's largest trading partner, even a modest slowdown in cross-border trade can have a meaningful impact on Canadian growth.

The BoC may therefore prefer to wait for clearer evidence of how tariffs are affecting the economy before changing policy.

## An insurance cut remains possible

Standard Chartered acknowledged that the Bank of Canada could still choose to deliver an earlier rate cut if policymakers want to protect the economy from a potential tariff shock.

An insurance cut would be intended to provide support before weaker trade activity shows up clearly in economic data.

However, the bank's base case remains that the BoC will wait rather than respond immediately.

## Trade de-escalation could reduce pressure on the BoC

Standard Chartered also sees a meaningful possibility that trade tensions could eventually ease.

If Canada and the United States make progress toward an agreement, downside risks to Canadian growth could diminish and the need for rate cuts could become less urgent.

An improvement in trade relations could also support business confidence and strengthen the Canadian Dollar.

## Markets may be pricing too many future rate hikes

Markets are currently pricing around 65 basis points of Bank of Canada rate increases by the middle of 2027.

Standard Chartered believes this expectation is too aggressive given uncertainty surrounding trade, inflation and economic growth.

If investors begin reducing expectations for future BoC tightening, Canadian bond yields could move lower and the Canadian Dollar could face additional pressure.

## What this means for the Canadian Dollar

The loonie remains caught between stronger domestic economic data and the negative effects of trade uncertainty.

Holding rates at 2.25% could provide some support to the Canadian Dollar in the short term, particularly if investors had expected an immediate cut.

However, expectations for a December reduction could limit upside potential.

The currency will also remain sensitive to U.S. interest-rate expectations, oil prices and developments in Canada-U.S. trade negotiations.

## What traders should watch next

Canadian inflation, employment and GDP data will be important for determining whether the Bank of Canada can continue holding rates steady.

Traders should also closely monitor tariff announcements and any signs of progress in negotiations between Ottawa and Washington.

A sharp deterioration in growth could bring rate-cut expectations forward, while resilient economic data and persistent inflation could encourage the BoC to remain patient.

For USD/CAD, the relative policy outlook between the Federal Reserve and Bank of Canada will remain a major driver in the weeks ahead.