Canadian dollar rally faces crucial US tariff deadline

CAD: Short-term rally meets tariff cliff

Canada’s July CPI came in hotter than expected and gave the Loonie another push higher. Headline inflation rose 3.0% y/y, above the 2.9% consensus and up from 2.8% in June, while monthly CPI increased 0.5%. The Loonie touched the day’s high after the release, with USD/CAD trading near 1.385, its lowest level since early June. The upside surprise adds to a recent run of stronger Canadian data, from jobs to manufacturing to trade.

The inflation details were not just about gasoline. Pump prices rose 25.7% y/y, but CPI excluding gasoline held at 2.2% for a third straight month, and CPI excluding food and energy rose 1.9%, above expectations. The BoC’s preferred core measures also firmed, with the average of median and trim moving to 2.0% from 1.9%. That puts core inflation right at the BoC’s target midpoint and leaves little room for near-term easing talk.

The rate-spread channel continues to support CAD. The US-Canada two-year spread is now around 119bp, with Canada’s two-year yield near 2.99% and the US two-year near 4.18%. That spread has compressed from roughly 145bp in late July as Canadian data have outperformed and US data have softened. The combination of firmer Canadian inflation, strong July hiring and weaker US momentum has sent the USD/CAD below 1.39.

The complication is trade. The August 19 deadline for threatened 50% US tariffs on a broad range of Canadian goods is now the main near-term risk. Talks continued through the weekend, but reports suggest key disputes remain across autos, dairy, aluminum and lumber. A deal or tariff pause could push USD/CAD toward 1.37, while an escalation could quickly send the pair back above 1.40. For now, the macro story favours CAD, but the next big move depends on whether that trade cliff is avoided.

USD: Struggles to hold the line

The dollar starts the week under pressure after the heaviest US data run since spring. Retail sales fell 0.6% in July, missing expectations for a small gain, while the control group dropped 0.4%, a weak signal for consumption and GDP tracking. That followed a mild CPI print, softer PPI, and a payroll report that already had markets questioning the need for another Fed hike. The data have shifted the discussion from inflation alone to whether demand is starting to lose momentum.

Treasuries tell a more complicated story. The US 2-year yield has fallen from its late-July peak as markets price out near-term Fed tightening, while the 10-year remains sticky around 4.69%. The 2s10s curve has steepened to approximately 52bps, its widest since May. The steepening has the front end reacting to softer data and the long end still carrying fiscal, supply and term-premium concerns. For the dollar, that mix limits the downside even as the domestic macro story weakens.

Geopolitics are also keeping the dollar from sliding more cleanly. The Iran ceasefire expires Monday, the Strait of Hormuz remains a live risk, and markets are waiting for details on a new US “economic isolation” plan for Iran. Oil has stayed contained despite the headlines, helped by expectations for softer global demand, but the risk is not gone. A diplomatic path would reduce the dollar’s oil-link bid, while renewed escalation could lift oil, long-end yields and the greenback.

Technically, DXY is still holding above the 99.50 area, the post-payrolls low that has become the near-term floor. A break below that level would bring 99.20 into view, followed by the May lows near 98. This week is lighter on US data, so the focus shifts to the July FOMC minutes and earnings from Walmart, Target and Home Depot for a cleaner read on the consumer. For now, the dollar is bruised by softer data, but not broken.

MXN: USD/MXN hits two-year low

USD/MXN closed Friday at 17.02, a fresh two-year low and the strongest peso print since May 2024. The pair has dropped 3.2% since its June 24 peak of 17.61, with carry still doing most of the work. Mexico’s two-year yield stands at 7.228%, versus 4.173% for the US two-year, leaving roughly 306bp of premium in MXN’s favor. That spread has narrowed from around 366bp in early June, but it remains compelling, especially after Banxico held rates at 6.50% for a second straight meeting and pushed its inflation convergence forecast to Q4 2027. The in-line US CPI print also helped by lowering the risk of a Fed-driven carry unwind.

The domestic backdrop is giving the peso more than just yield support. Mexico’s economy rebounded 1.5% q/q in Q2 after contracting in Q1, helped by record exports, while international reserves rose to $257.09bn in the week ended August 7. Inflation is close to target at the headline level, but core inflation at 3.95% and services inflation at 4.36% keep Banxico cautious. That supports a higher-for-longer stance and reduces the risk that the peso’s carry advantage fades quickly. Mexico’s growing role in the US AI infrastructure buildout also adds a structural tailwind, with data-center-related exports strengthening the current account.

The near-term setup is constructive but crowded. USD/MXN has broken through 17.40, 17.20, 17.10 and 17.05, leaving 17.00 as the next key level. A sustained break below 17.00 would open the door to 16.80–16.90, levels last seen in mid-2024. Positioning is supportive but stretched, with leveraged funds holding 67,840 net long MXN contracts, the highest since December. The Iran sanctions announcement, the FOMC minutes and any Banxico signal on future easing are the key near-term tests.

What’s happening in markets this week?

The week starts with global growth and inflation data (Mon), including China retail sales and industrial production, Japan GDP and industrial production, US Empire manufacturing and Canada CPI. The focus then shifts to activity and labour data (Tue), with the German ZEW survey, UK jobs, Japan’s 5-year bond auction, and US industrial production, housing data and import prices.

The key policy and trade events land midweek. FOMC minutes, UK inflation and the US-Canada tariff deadline (Wed) will be the main focus, with markets watching Fed divisions and the threatened 50% US tariffs on roughly US$20bn of Canadian goods. Central banks, claims and earnings (Thu) follow, including Australia jobs, the Riksbank decision, Japan’s 20-year auction, US jobless claims, the leading index, and Alibaba and Walmart results. The week closes with PMIs and inflation (Fri), including Japan CPI, euro-area PMIs and consumer confidence, UK PMIs, retail sales and borrowing, and US PMIs.

Market snapshot

Table: Currency trends, trading ranges & technical indicators

Key global risk events

Calendar: August 17 – 21

All times are in EST

Have a question? [email protected]

*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.