Canada's Tariffs Trigger Caution Ahead of Central Bank Meeting

Canada's retaliatory tariffs on US imports are set to kick in on September 8th, targeting around C$28 billion worth of goods. The measures include 15%, 25%, and 50% duties across hundreds of US products, with support for affected businesses and workers also announced.

The Bank of Canada's job is complicated by these tariffs, as they can lift prices for consumers and firms while discouraging investment and hiring. This combination points to softer growth, which would suggest lower interest rates, but also stickier inflation, indicating higher rates. Corpay's base case is that the central bank holds its policy rate next week for a sixth straight meeting and uses a more cautious tone.

Markets are still pricing at least two rate hikes over the next year, so any signal that the Bank of Canada is less inclined to hike could quickly reset expectations. If the central bank sounds more dovish than markets expect, traders will trim their forecasts for Canadian rates relative to US rates, narrowing the potential 'yield advantage' that makes holding Canadian dollars attractive.