Agility Forex Weekly Commentary

By Michael O’Neill

Once again, the Bank of Canada has chosen the path of least resistance. And once again, it’s the wrong one.

Governor Tiff Macklem and his Governing Council, the people responsible for promoting “the economic and financial welfare of Canada,” reacted to President Trump’s declaration of economic warfare on Canada by doing nothing—nada, nil, zilch.

The policymakers noted that trade tensions have pummeled the economy, leaving growth dented and demand sagging. Businesses, bracing for softer sales, have slammed the brakes on hiring and investment. The unemployment rate has jumped to 6.9% from 6.6% at the start of the year.

Furthermore, they estimate that economic growth fell by 1.5% y/y in Q2, widening the output gap to somewhere between -1.5% and -0.5%.

But they hope things will get better.

The BoC is crossing its fingers for a modest rebound in growth starting in the back half of 2025, with momentum picking up through 2026 and 2027. That’s the optimistic version. Even if it happens, the trajectory for Canada’s GDP is permanently lower thanks to tariff-fueled damage that’s kneecapped productivity, investment, and trade flows.

On inflation, the headline number is behaving itself near 2%, but core measures are still sticky and elevated. In their “current tariff scenario,” the Bank expects inflation to hover around target—but with enough underlying pressure to keep a rate cut buried in the fine print.

That means lowering interest rates to help jumpstart the economy was a “no-brainer.”

What’s the worst that could happen? Somewhere down the line, rates may have to be increased—but in the meantime, lower rates will boost housing demand and save consumers and businesses money. Mortgage holders renewing at punishingly high rates would get some much-needed breathing room.

Frozen in Fear

BoC policymakers can see the headlights and Ozzy’s crazy train is racing at them full throttle. They are afraid of making a mistake—and justifiably so. In early 2022, inflation was “transitory.” In 2023, rate hikes would “cool the economy without a recession.” In January 2025, the base-case projection still showed smooth sailing. They were wrong on all counts—and now, with the economy contracting, housing activity cratering, and wage growth rolling over, we’re being told “let’s wait and see.”

Wait for what? A recession press release.

Is Powell Provoking Trump?

It’s fair to say that Fed Chair Jerome Powell may not hold President Trump in high esteem—and everyone knows what Trump thinks of Powell.

So, did the FOMC freeze rates at 4.50 % for the fifth straight meeting just to yank the chain of the belligerent, blowhard President—or was it a data-driven call rooted in economic fundamentals?

The Fed statement suggests it is a data-driven decision due to elevated inflation and solid labour market conditions. It noted that inflation remains somewhat elevated—“While the Committee aims for 2 percent inflation over the longer run, current readings (like the June CPI at 2.7%) were still above this target.” It also pointed out that the unemployment rate remained low, and labour market conditions were described as “solid.”

For a central bank whose mandate is to promote maximum employment and stable prices, it was the right call. Traders appear to agree. The odds for a September rate cut dropped from 63% pre-yesterday to 47.3% post-statement.

Not everyone agreed—particularly the two FOMC Governors, Christopher Waller and Michele Bowman, who are shamelessly appealing to Trump’s ego to earn his nomination for Fed Chair. They voted to chop rates by 25 bps.

Tariff Trap for the Loonie

The BoC may be waiting for Godot, but markets don’t have that luxury. August 1 isn’t just another Friday—it’s D-Day for Canadian trade. That’s when President Trump’s punitive 35% tariffs kick in unless a miracle deal materializes. Spoiler alert: it won’t.

Canada’s export machine is already sputtering, and a 35% wall at the border could tip what’s left of manufacturing over the edge. Add in weakened consumer spending, battered business confidence, and a housing market that’s barely breathing, and you’ve got the makings of a made-in-Washington recession.

For the Canadian dollar, it’s an unappetizing stew of uncertainty, deteriorating fundamentals, and a central bank too timid to respond. Even worse, August is a holiday month, when liquidity typically evaporates, which may exacerbate volatility. In that environment, USDCAD will remain bid above 1.3600 and drift toward 1.4000.

So here we are. The Fed can’t cut because its economy is too hot. The BoC won’t cut because although the economy is a dumpster fire… they might be wrong.

Instead of acting, the BoC froze—caught in the policy headlights like a terrified deer. Venison, anyone?