By Michael O’Neill

If the Canadian economy had wings, it would be a Canada Goose.

The comparison isn’t exactly flattering. Geese are loud, stubborn, and prone to clogging up runways, which makes them a perfect metaphor for an economy that often struggles to get airborne. Sure, they travel in flocks, but that just underscores Canada’s dependence on its neighbours, particularly the U.S., for direction.

While the Canada Goose is often associated with the country, the bird that appears on the Canadian dollar coin is the Common Loon (hence the name Loonie).

The Canadian economy, like the Loon, may not be the flashiest, but it is known for having an abundance of natural resources including energy and the flavour of the day, rare earth elements. Analysts project Canada could produce 10,000-15,000 tonnes of rare earth oxides annually by 2030, capturing an estimated 7–10% of non-China global supply.

But that’s not helping today because 2030 is still 5½ years away, and the economy is barely treading water.”

Q2 GDP contracted at a 1.6% annualized pace and it doesn’t look like it will be improving any time soon.  

Tariffs Weighing Heavy

President Trump singled out Canada for special attention when he was slapping tariffs willy-nilly. Canada was hit with a 35% levy—not as bad as India, Brazil, and Switzerland but worse than China and Mexico. It hurt.

Canada’s economy shrank a couple of sizes in Q2, falling 1.6% y/y as exports collapsed 26.8%. The tariffs scared business investment away as companies avoided spending money on machinery and equipment. Consumer spending was a bright spot, rising 4.5%, but that may have been due to households stocking up ahead of tariffs. It should be noted that Canada has removed tariffs on all goods covered by the free trade agreement.

The results won’t be a surprise to the policymakers at the Bank of Canada—they predicted as much in the latest Monetary Policy Report.

BoC Priming for a Rate Cut

The Bank of Canada is likely to trim rates when it meets on September 17. With the Fed almost certain to cut by 25 bps the same day, the timing is perfect. The Fed’s odds of a move are a near certainty, according to the CME FedWatch tool, which means the BoC (whose decision drops four hours earlier) can clear the path without fear of widening spreads or roiling markets. Policymakers have already telegraphed that growth is sputtering, inflation is easing, and tariffs are biting.

Sideshow Donnie and His Legal Woes

Markets smirked at the latest legal twist in Washington when the U.S. Court of Appeals ruled—by a 7–4 margin—that presidential authority to “regulate” imports does not extend to tariffs imposed by executive order. Simply put, Trump’s tariff strategy is illegal.

To say Trump was annoyed is an understatement. He appears to have vented on a Venezuelan crime syndicate (Tren de Aragua) by announcing that the US military made a “kinetic strike” on a drug smuggling boat.

He also ranted on his TruthSocial account that the tariff ruling was made by a “Radical Left group of judges”

The immediate market impact? Virtually nil. Traders shifted their focus to economic data, aware tariffs stay in place until October 14” (unless the Supreme Court agrees to expedite Trump’s appeal), which is well past the next FOMC meeting.

Powell’s Pivot

Powell’s Jackson Hole remarks made clear he is pivoting from hawk to dove. Markets  are pricing a 95% chance of a 25 bp cut on September 17, but speculation about a 50 bp move lingers—especially if nonfarm payrolls revisions reveal a gaping hole. Goldman Sachs has already warned of as much as a 550,000 downward revision to the year’s totals.

For the Canadian dollar, this is critical. Falling U.S. interest rates may limit the Loonie’s downside in the near term as the first rate cut suggests it won’t be the last.

Birds of a feather flocking together isn’t so much a proverb as a survival strategy for the Loonie.