Canadian Dollar Hits 6-Month High

The US dollar fell against its major trading partners early Monday, though it has begun to partially recover, as the focus turns to home sales data this week and the International Monetary Fund's annual meeting.

Monday's schedule is light, with only an appearance by Chicago Fed President Austan Goolsbee at 8:30 am ET and leading indicators data for March due to be released at 10:00 am ET.

Tuesday, the Philadelphia Federal Reserve will release its monthly nonmanufacturing report, and the Richmond Fed will publish its monthly conditions report.

Highlights Wednesday include S&P Global's flash conditions estimates, new home sales and the Fed's Beige Book report.

Thursday's busy schedule includes weekly jobless claims, existing-home sales, and durable goods orders.

Friday's key release will be the final University of Michigan consumer sentiment reading for April.

A quick summary of foreign exchange activity heading into Monday:

rose to 1.1518 from 1.1391 at the Friday close and 1.1375 at the same time Friday morning. There are no Eurozone data on Monday's schedule. The next European Central Bank meeting is scheduled for June 4-5.

rose to 1.3383 from 1.3285 at the Friday close and 1.3275 at the same time Friday morning. Monday is a holiday in the UK, so there are no data on the schedule. The next Bank of England meeting is scheduled for May 8.

fell to 140.9501 from 142.1452 at the Friday close and 142.3281 at the same time Friday morning. There were no Japanese data released overnight. The next Bank of Japan meeting is scheduled for April 30-May 1.

fell to 1.3813 from 1.3847 at the Friday close and 1.3855 at the same time Friday morning. There are no Canadian data on Monday's schedule. The next Bank of Canada meeting is scheduled for June 4.

The Canadian dollar could suffer if U.S. tariffs lead to a recession in Canada, MUFG Bank analyst Derek Halpenny says in a note. The Bank of Canada on Wednesday published two scenarios on what could happen regarding tariffs. The first scenario is tariffs being eventually withdrawn with Canadian growth temporarily slowing and inflation easing temporarily. The second predicts a deep recession and a brief spike in inflation if tariffs result in a long-lasting trade war. The Canadian dollar is trading more in line with the first scenario, Halpenny says. Any signs of the second scenario emerging would likely put renewed downward pressure on the Canadian dollar, he says. The U.S. dollar rises 0.3% to 1.3902 Canadian dollars. (renae.dyer@wsj.com)

The US dollar rose against its major trading partners early Thursday ahead of the release of weekly jobless claims, home building data for March and the Philadelphia Federal Reserve's manufacturing reading for April, all at 8:30 am ET.

Weekly natural gas stocks inventories are due at 10:30 am ET, followed by an update to the Atlanta Fed's gross domestic product growth Nowcast estimate for Q1 around midday.

Fed Governor Michael Barr is due to speak at 11:45 am ET.

A quick summary of foreign exchange activity heading into Thursday:

fell to 1.1358 from 1.1390 at the Wednesday US close and 1.1362 at the same time Wednesday morning. The European Central Bank is expected to announce a 25 basis point rate reduction in its post-meeting statement at 8:15 am ET. There are no Eurozone data on Thursday's schedule.

fell to 1.3229 from 1.3240 at the Wednesday US close and 1.3266 at the same time Wednesday morning. There are no UK data on Thursday's schedule. The next Bank of England meeting is scheduled for May 8.

rose to 142.5221 from 142.0755 at the Wednesday US close but was below a level of 142.7491 at the same time Wednesday morning. The Japanese trade surplus narrowed in March according to data released overnight. The next Bank of Japan meeting is scheduled for April 30-May 1.

rose to 1.3890 from 1.3860 at the Wednesday US close but was below a level of 1.3917 at the same time Wednesday morning. The Bank of Canada held interest rates steady on Wednesday, as expected, saying that the monetary policy cannot offset tariff impacts, so the focus needs to be on price stability. The next Bank of Canada meeting is scheduled for June 4. Data on Canadian securities purchases in February are due to be released at 8:30 am ET.

On a day in which the US dollar (USD) sold off across G10, the Canadian dollar (CAD or loonie) advanced by 0.7% on Wednesday helped in part by the decision of the Bank of Canada to hold off from cutting rates again — the first pause from the BoC since the beginning of the easing cycle in June last year, said MUFG.

The OIS market was partially priced for a 25bps cut — at about a 35%-40% probability — so the hold helped push lower, wrote the bank in a note to clients. Nonetheless, the move lower was relatively modest given the US dollar was weaker more broadly, given that Governor Tiff Macklem was very clear that the BoC was willing to respond "decisively" if required on any new information that justified action.

The statement itself was a little more nuanced and not as explicit, with the BoC unwilling to provide clear guidance, stated MUFG. The Governing Council would "proceed carefully, with particular risks and uncertainties facing the Canadian economy."

The BoC also published its Monetary Policy Report and, given the difficulty in forecasting the outlook, presented two scenarios — Scenario 1 was the more benign with trade tariffs "negotiated away" but under a difficult and uncertain process that lasts through to the end of 2026. Scenario 2 assumed the current tariffs are added to by the United States and a "long-lasting trade war unfolds."

Scenario 1 sees global and Canadian growth slow temporarily and inflation declines to 1.5% for one year and then returns to the 2.0% target. In scenario 2, there is a sharper downturn in global growth and inflation picks up, but in Canada a "significant recession" unfolds with a temporary pick-up in inflation to 3.0% by mid-2026 before then returning to the 2.0% target.

Based on these scenarios and the comment from Governor Macklem to act "decisively" if required, this pause probably won't last and a rate cut in June is likely, assuming by then investors have more clarity in U.S. trade policy, added the bank.

According to MUFG, 50bps of cuts are priced in the OIS market, which the bank believes reflects Scenario 1 laid out by the BoC — the more benign one. Anything more aggressive, and the BoC will cut by more than priced.

With little in the way of guidance from the BoC, rates in Canada haven't moved much since the meeting and whether the BoC needs to act more aggressively will only be determined once markets get tariff policy clarity, noted MUFG. Rate spreads are also less influential at the moment on moves, but current levels of are also more aligned with Scenario 1 from the BoC and any signs of Scenario 2 emerging would likely put renewed downward pressure on CAD.

The Bank of Canada has left its policy interest rate unchanged at 2.75% on Wednesday despite the consumer price index coming in softer the day before and anxiety over the economic impact from United States tariffs, said ING.

Markets had been pricing around a one-third chance of a 25bps cut while economists saw it closer to being a coin toss, with 15 banks, including ING, favoring 'no change' and 14 expecting a 25bp cut. The bank's belief was that the tariff carve-out for USMCA-compliant products mitigates to some extent in the near term, while the proximity to next week's election also probably played a role in the BoC choosing to keep some ammunition back.

The accompanying press release states that tariffs have "increased uncertainty, diminished prospects for economic growth, and raised inflation expectations." This makes it very challenging to come up with forecasts.

The BoC has a range of scenarios where on one extreme there is a limited tariff environment that temporarily weakens growth and inflation stays close to 2%. The other extreme of an all-out protracted trade war that leads to a deep recession with inflation rising above 3%.

There is no guidance from the BoC given that such an uncertain period lies ahead, pointed out the bank. The BoC merely states that "our focus will be on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval." The BoC has already cut rates from 5.0% down to 2.75%, with the BoC most recently cutting 25bps in January and March.

Further cuts are coming though, as risks are skewed towards weaker growth, while the removal of the carbon consumption tax will depress inflation over the coming year. This will help to mitigate the effects of higher imposed tariffs on U.S. products and allow 25bp cuts at the next two BoC policy meetings in June and July, according to the bank.

Market pricing for future BoC moves will follow trade news very closely in the coming weeks. Anyway, by the June meeting, data will have given some clarity about the tariff impact, added ING.

The OIS curve is pricing in roughly 16bps for June, and 50bps by the end of the year. If the bank is right with its view that the BoC will frontload easing in June and July, ING expects to see some steepening in the Canadian dollar (CAD or loonie) curve as front-end yields remain compressed while the long-end can remain affected by further underperformance in U.S. Treasuries.

The net impact on CAD should be negative, although probably spread out over the next few months. ING isn't convinced the idiosyncratic pressure on the US dollar (USD) is due to be unwound soon, so it still thinks will attract buyers around 1.40.

The Canadian dollar strengthened past $1.39, close to its five-month high of $1.387 recorded on April 11th, as investors digested the Bank of Canada's recent policy decision, combined with a weakening U.S. dollar driven by escalating trade uncertainties.

The Bank of Canada maintained its benchmark rate at 2.75%, its first pause after cumulative cuts of 2.25 percentage points over seven meetings, citing an unclear U.S. tariff outlook that could either support steady growth with inflation near 2% or, if tariffs intensify, trigger a recession and higher inflation.

This cautious stance has cemented expectations of a stable monetary framework for Canada, bolstering the CAD, while the US dollar falters under the weight of potential new tariffs on critical minerals add further uncertainty to the U.S. growth outlook.