Canadian Dollar Rises on Inflationary Pressures

The US dollar fell against its major trading partners early Thursday before a busy schedule of economic data releases.

Weekly jobless claims data and the Philadelphia Federal Reserve's manufacturing reading for February are both due at 8:30 am ET, followed by leading indicators data for January at 10:00 am ET.

Weekly natural gas stocks inventory data are set to be released at 10:30 am ET and weekly petroleum stocks inventory data are due at 11:00 am ET.

Chicago Fed President Austan Goolsbee is due to speak at 9:35 am ET, followed by Federal Reserve Vice Chair for Supervision Michael Barr at 2:30 pm ET and Fed Governor Adriana Kugler at 5:00 pm ET.

A quick summary of foreign exchange activity heading into Thursday:

rose to 1.0438 from 1.0426 at the Wednesday US close and 1.0425 at the same time Wednesday morning. Eurozone construction output was flat in December, according to data released earlier Thursday. Eurozone consumer confidence data for February are due to be released at 10:00 am ET. The next European Central Bank meeting is scheduled for March 5-6.

rose to 1.2614 from 1.2587 at the Wednesday US close and 1.2582 at the same time Wednesday morning. UK manufacturing expectations deteriorated further in February according to data released earlier Thursday. The next Bank of England meeting is scheduled for March 20.

fell to 150.0598 from 151.4685 at the Wednesday US close and 151.7915 at the same time Wednesday morning. There were no Japanese data released overnight, turning the focus to January consumer price data and February business conditions data to be released Friday. The next Bank of Japan meeting is scheduled for March 18-19.

fell to 1.4216 from 1.4226 at the Wednesday US close but was up from a level of 1.4211 at the same time Wednesday morning. Canadian industrial products, raw materials and home price data for January are due to be released at 8:30 am ET. The next Bank of Canada meeting is scheduled for March 12.

The Canadian dollar could weaken against the U.S. dollar in the short term on the Federal Reserve's more cautious stance on interest-rate cuts compared to the Bank of Canada, Commerzbank analyst Michael Pfister says in a note. "Our economists no longer expect the Fed to cut interest rates twice in the first half of the year, but rather to postpone these cuts until the turn of the year." However, the BOC is likely to finish its policy easing cycle soon with a final rate cut in April. This will help the Canadian dollar recover on a sustained basis from early summer. Commerzbank expects USD/CAD to rise to 1.44 by March, from 1.4227 currently, before falling towards 1.38 by December. (renae.dyer@wsj.com)

Last year wasn't a particularly good one for the Canadian dollar (CAD or loonie) and the first few weeks of 2025 have also been very "stormy" for the Canadian currency, said Commerzbank.

As a reminder, last year was so difficult for the CAD in part because, after many months of stagnation, Canadian disinflation finally made progress, meaning that the bank can now talk about inflation being in line with the target.

At the same time, however, the Canadian real economy has also weakened significantly. Particularly in comparison with the outstanding United States growth, the impression was that the Canadian real economy was moving closer towards the weak growth numbers in Europe, and the CAD suffered accordingly, stated Commerzbank.

The fact that the Bank of Canada has since responded to the changing picture by cutting interest rates by 200 basis points, so widening the interest rate differential with the U.S., has also not helped the CAD.

Another issue has emerged in recent weeks: the inauguration of U.S. President Donald Trump and his planned trade policy. During his election campaign, Trump made it very clear that he would introduce high tariffs on U.S. imports. However, it came as a surprise that Trump targeted Canada so strongly for his first tariffs, along with Mexico and to a lesser extent China.

After all, Trump had helped negotiate the revision of the North American Free Trade Agreement (NAFTA). In addition, the justification — illegal immigration is too high and countries aren't doing enough to combat the flood of fentanyl — may apply to Mexico, but certainly not to Canada to the same extent, wrote the bank in a note.

However, this didn't stop Trump from announcing the introduction of 25% tariffs on Canadian and Mexican imports on Feb. 4, sending to its highest level since 2003. However, the tariffs and CAD weakness didn't last long. First, the Mexican president secured a 30-day delay, followed later by the Canadian prime minister. Both have agreed to invest more in border protection, ensuring that negotiations will begin now.

Following the postponement, the CAD rallied strongly and is now trading at levels last seen in early December, pointed out Commerzbank.

It's difficult to say at the moment whether a possible 'deal' can be negotiated within 30 days that would satisfy Trump and lead him to waive the tariffs, noted Commerzbank. At the same time, it should be noted that the U.S. current account deficit has hardly played a role in Trump's announcements so far and that he has only used tariffs to extract political concessions.

If he does decide to focus more on the current account deficit, tariffs on Canadian products are likely to come back into focus given the large deficit.

However, the bank finds it difficult to incorporate such uncertainties more strongly into its forecast. At the moment, there is so much volatility in the announcements that in the first few hours of trading, the CAD can weaken very strongly, only to make up all its losses in later hours.

Commerzbank's base case remains that Canada will succeed in convincing Trump of a deal so that the medium-term impact will be rather small.

At first glance, it may seem surprising that the bank has recently changed its forecast higher in light of this scenario. However, the main reason is that Commerzbank no longer expects the Federal Reserve to cut interest rates twice in the first half of the year, but rather to postpone these cuts until the turn of the year. This more hawkish U.S. monetary policy should be reflected in a stronger US dollar (USD).

On the Canadian side, the bank continues to see a case for lower levels in the coming months. The real economy is now showing the first signs of recovery and the BoC is likely to finish its rate cuts soon. While the bank is still inclined to expect a final rate cut of 25bps in April, that should be the end of it.

Until the end of March, the more hawkish U.S. monetary policy than previously expected should continue to outweigh the CAD-supportive factors, added Commerzbank. After that, however, it expects to move significantly lower from the current rather high levels — in other words, the CAD should be able to make up ground against the USD.

However, the biggest risk to this forecast comes from the U.S.: if tariffs of 25% are imposed on all Canadian exports to the U.S., the CAD would suffer much more than is currently reflected in the bank's forecast. This is something to bear in mind.

The US dollar rose against its major trading partners early Wednesday, except for a decline versus the yen, ahead of the release of housing starts data for January and the New York Federal Reserve's services index reading for February, both at 8:30 am ET.

Weekly Redbook same-store sales data are due to be released at 8:55 am ET, followed by an update to the Atlanta Fed's gross domestic product growth Nowcast model around midday.

Minutes of the Federal Open Market Committee's Jan. 28-29 meeting are due to be released at 2:00 pm ET and Fed Vice Chair Philip Jefferson is scheduled to speak at 5:00 pm ET.

Earlier Wednesday, the Mortgage Bankers Association said that mortgage applications declined in the week ended Feb. 14 despite a further downtick in mortgage rates.

A quick summary of foreign exchange activity heading into Wednesday:

fell to 1.0424 from 1.0447 at the Tuesday US close and 1.0463 at the same time Tuesday morning. The Eurozone current account surplus widened in December, data released earlier Wednesday showed. The next European Central Bank meeting is scheduled for March 5-6.

fell to 1.2581 from 1.2607 at the Tuesday US close and 1.2605 at the same time Tuesday morning. UK consumer prices declined in January but the year-over-year rate accelerated for both the overall reading and the core measure, according to data released overnight. The next Bank of England meeting is scheduled for March 20.

fell to 151.7863 from 152.0351 at the Tuesday US close and 151.8480 at the same time Tuesday morning. Japanese business sentiment improved slightly in February while the trade deficit widened in January, according to data released overnight. The next Bank of Japan meeting is scheduled for March 18-19.

rose to 1.4213 from 1.4189 at the Tuesday US close and 1.4197 at the same time Tuesday morning. There are no Canadian data on Wednesday's schedule. The next Bank of Canada meeting is scheduled for March 12.

The Canadian dollar weakened past 1.42 per USD, halting its rebound from a 22-year low of 1.455 on January 31 as investors digested mixed inflation data.

Annual inflation in January edged up to 1.9% from 1.8%, keeping it at or below the BoC’s 2% midpoint target for the 6th consecutive month and supporting expectations for continued easing.

Although rising gasoline prices drove the uptick, tax breaks helped lower food costs.

However, core measures such as the median and trimmed-mean rates remained elevated at 2.7%, above forecasts.

Recent BoC minutes warned that prolonged uncertainty over potential U.S. tariffs could dampen business investment and fuel inflation, prompting policymakers to withhold forward guidance.

Despite lingering fears over Trump’s new 25% tariffs on steel and aluminum and the risk of reciprocal tariffs escalating trade tensions, the Canadian dollar's recovery has been bolstered by a temporary exemption secured by Prime Minister Trudeau to allow further negotiations.

Canada will publish the consumer price index figures for January at 8:30 a.m. ET Tuesday, noted Commerzbank.

Investors are likely to see slightly higher year-on-year rates again, wrote the bank in a note to clients. The main reason for this is that a drop in prices from the previous January is removed from the calculation of the annual rate, which mechanically increases the annual rate.

Irrespective of this base effect, Tuesday's figures are unlikely to contain much new information, stated Commerzbank. Although price increases have recently been somewhat higher than before, this is more likely to be a sign that Canada is settling into a headline rate of around 2% year-on-year.

Inflation would have to surprise significantly in either direction for the Bank of Canada to change its stance. The bank's baseline scenario remains that the BoC will keep rates on hold next month and then cut rates — for the last time in this current cycle — at the meeting after next.

Even without the real economic data, the Canadian dollar (CAD or loonie) has rallied significantly in recent weeks. Although Commerzbank added that it has long predicted that the CAD would turn around this spring, the bank believes that the market is currently anticipating this somewhat prematurely.

Negotiations with the United States government are likely to be rocky, while at the same time, Commerzbank sees scope for a somewhat stronger US dollar (USD) in the short term. As a result, while the bank still sees potential for lower levels, Commerzbank thinks it could be several months before this happens.