Trade War Uncertainty Fails to Move Bond and Currency Markets

The trade uncertainty between Canada and the US has led to unexpected stability in bond and currency markets. Despite strong Q2 GDP growth, the Canadian economy appears unsteady due to the broken trade deal with its neighboring country.

Derek Johnson and Rohan Thiru, VPs and Portfolio Managers at Canoe Financial, explain that an unresolved balance of uncertainties about tariff impacts has kept bond markets on hold. They suggest that the market may be expecting a resolution to the trade war, which could lead to a mutual interest in resolving the issue.

The key issue for bond markets is whether US tariffs and Canadian retaliatory tariffs put more pressure on GDP growth or inflation. If the economic devastation from these tariffs is significant, Johnson and Thiru expect the Bank of Canada to reduce interest rates. However, if inflation rises significantly, the BoC may be forced to hold rates or hike to calm down inflation.

Currency markets have also shown relative stability due to uncertainty around impacts on inflation and growth. Murza Shaheryar Baig, Global FX Strategist at Desjardins, notes that markets may be fatigued by tariffs and prefer to look through the rhetoric. However, he expects a currency reaction when trade dynamics become permanent.