Canadian Dollar: Mean reversion faces tariff headwinds – Societe Generale

Societe Generale strategists note that softer June inflation in Canada has stalled the Canadian Dollar’s (CAD) rebound from 1.4250 toward 1.40 against the US Dollar (USD). Failure to reclaim the 50-day moving average around 1.3991 and new US tariffs on Canadian goods complicate the mean-reversion. Technical levels at 1.3970 and 1.3870/1.3850 define downside, with 1.4150/1.4175 as interim resistance.

Tariffs weigh on Canadian Dollar outlook

"Headline CPI slowed to 2.8% yoy in June and core dipped to 1.8%, the lowest since Dec-20. For the BoC, this will reassure that spillovers to supply chains and non-energy goods from energy are contained. The bank last week estimated that CPI inflation would stay elevated in June and then ease gradually in the coming months, returning to around 2% in early 2027."

"In Canada, below forecast inflation data for June will reinforce the status quo of the BoC and brought a (temporary) halt to the rebound in the CAD from 1.4250 to 1.40/USD."

"The policy rate is judged to be appropriate. Money markets currently price just 18bp of tightening in six months, in line with the RBA but well below the ECB (+45bp), Fed (+42bp) and BoE (+41bp)."

"Technically, the failure to reclaim the 50dma at 1.3991 does not have to be the end of the mean-reversion since the end of June but raises the bar especially after the US imposed new 50% tariffs on $20bn worth of Canadian goods. The 2y UST/GCAN spread widened again by 6bp to 136bp, having tightened previously from 142bp."

"Technically, the violation of 1.3970 would open a return to May lows around 1.3870/1.3850. Last week's high at 1.4150/1.4175 is interim resistance."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)