Canadian dollar slides 0.6% as soft CPI dims BoC tightening path

Canada's softer-than-expected inflation data erased the Loonie's relative yield advantage, sending the currency to the bottom of the G-10 leaderboard.

The Canadian dollar weakened 0.6% against its US counterpart Monday, making it the worst-performing major currency, after headline and core consumer price inflation both came in below forecasts. The data reduced expectations that the Bank of Canada would resume tightening after holding its policy rate at 2.25%, narrowing the yield spread that had supported the Loonie in recent weeks.

"The soft CPI print removes the urgency for the BoC to signal further hikes, and the market is repricing that probability lower," said James Okafor, macro strategist at Edgen. "With the US dollar also drawing support from ongoing tariff dynamics, USD/CAD has room to test higher levels in the near term."

USD/CAD climbed to 1.3720, its highest in two weeks, as the yield on Canada's two-year government bond fell 8 basis points to 3.12%, widening the spread versus US two-year Treasuries to 185 basis points. The move accelerated after Statistics Canada reported headline CPI rose at an annualized pace of 2.1% in June, below the 2.4% consensus estimate and down from 2.6% in May. Core CPI, which excludes food and energy, decelerated to 1.9% from 2.2%, undershooting the 2.1% forecast.

The data marks the second consecutive month of cooling inflation after a brief acceleration in April, when headline CPI touched 2.8%. The trend gives the BoC room to maintain its current stance through its September 9 policy meeting, with overnight index swaps now pricing less than a 20% probability of a rate increase by year-end, down from 35% before the release.

The Canadian dollar's decline was compounded by renewed US tariff rhetoric. President Donald Trump over the weekend reiterated plans to impose a 10% tariff on Canadian aluminum imports, citing national security grounds, a move that would affect roughly C$4.5 billion in annual trade. Canada's export-dependent economy is particularly sensitive to trade disruptions, with goods exports accounting for about 32% of GDP.

For the BoC, the inflation undershoot provides cover to hold rates steady through the third quarter, but the tariff threat introduces a stagflationary risk — weaker growth from trade friction alongside potential import-price pressures. Governor Tiff Macklem said in a July 16 speech that the bank was "closely monitoring" the inflation trajectory and would "respond as needed," language that markets interpreted as neutral.

The last time Canadian core CPI surprised to the downside by a similar magnitude was in January 2025, when the data printed 0.3 percentage points below consensus. In the following two weeks, USD/CAD rose 1.8% as the BoC held rates while the Federal Reserve maintained its hawkish posture.

This article is for informational purposes only and does not constitute investment advice.