Canadian Dollar Hits One-Month Low

The Canadian dollar weakened to around 1.39 per USD in mid-September, a one-month low, after a relatively tame inflation report. The headline CPI rose 3.0% year-on-year in August, unchanged from July and matching market expectations. The Bank of Canada’s preferred median and trimmed-mean measures remained contained at 2.0% and 1.9%, respectively, refraining from accelerating despite soaring energy costs. Meanwhile, escalating conflict in the Middle East continued to raise wholesale oil and fuel prices. Higher oil prices typically support the Canadian dollar, as Canada is a major crude exporter, but the latest surge is also reviving inflation concerns and strengthening the case for tighter US monetary policy. The Fed is expected to raise interest rates on September 16th, supporting the US dollar.

The Canadian dollar strengthened to around 1.38 per USD in September, largely reflecting broad US dollar weakness. Meanwhile, Canada’s retaliatory tariffs on US goods took effect after Prime Minister Mark Carney’s government failed to reach a deal with Washington last month. The counter-tariffs cover $20 billion of US goods, with duties ranging from 15% to 50% on products including steel, furniture, clothing and electronics. The tariffs imposed last month targeted $20 billion, or 5%, of Canadian exports to the US, including wine, furniture, dairy products, cement, clothing, fishing rods and hockey equipment. Firmer crude prices, which typically support the loonie given Canada’s status as a major oil exporter, have provided an additional tailwind. Further upside risks to oil prices remain as Iran threatens to strike regional energy infrastructure in response to US actions. Energy-driven inflation concerns could also lead to tighter BoC policy.

The Canadian dollar weakened to around 1.39 per USD following the release of domestic and US employment data. Employment in Canada declined by 41,700 in August, missing expectations for a 15,000 increase and following a 75,100 gain in July. The weak labor data could support a more dovish stance from the BoC. Meanwhile, US payrolls increased by 162,000, about three times the consensus estimate. The strong report boosted expectations for a September Fed rate hike. This backdrop could widen the interest-rate differential between the US and Canada, favoring the US dollar over the loonie. The BoC kept its key policy rate unchanged at 2.25% at its September meeting, as widely expected. However, it noted that inflation risks had increased, while new tariffs had made the growth outlook more uncertain. The BoC left the future path of monetary policy open, saying it would adjust policy as needed. Governor Macklem said policymakers were prepared to raise rates if inflation remained elevated.