Canada's Q2 Rebound Threatened by Deepening Trade War with US

Canada's economy is expected to rebound in Q2, driven by domestic demand and exports. According to Brown Brothers Harriman's (BBH) Elias Haddad, Real GDP will rise 3.4% SAAR, outpacing the Bank of Canada's (BoC) projection of 2.5%. This growth is attributed to a strong recovery in domestic demand and exports.

However, the deepening US-Canada trade war poses a significant risk to this recovery. The recent collapse of trade talks between the two countries has led to a fresh round of tariffs, with 50% duties on nearly $20 billion in imports from Canada (0.85% of Canada's GDP) kicking in on Saturday.

The tariff applies to a range of products, including wine, hockey sticks, and cement, but does not affect energy, potash, or other goods subject to tariffs under Section 232. Canada will match the new US tariffs dollar for dollar from September 8.

Despite these risks, the Bank of Canada can afford to keep interest rates on hold, as core inflation remains close to the 2% target. This implies that there is room for the swaps curve to adjust lower against CAD in the near term.