Michael Pfister at Commerzbank highlights a strong Canadian labour market and improving Gross Domestic Product (GDP), Purchasing Managers’ Index (PMI) and exports as signs of real-economy recovery, but warns this is fragile due to threatened US tariffs. Pfister expects a United States-Mexico-Canada Agreement (USMCA) extension to be agreed and remains optimistic that the Canadian Dollar (CAD) will appreciate over coming months, albeit with setbacks driven by US trade policy.

Stronger data but trade tensions linger

“In contrast to the US labour market, the Canadian labour market delivered a very positive surprise on Friday. While the median Bloomberg consensus forecast had predicted the creation of 20,000 new jobs, roughly 75,000 were actually created. In light of these figures, the unemployment rate also fell unexpectedly to 6.4%, its lowest level in two years, marking a decline of half a percentage point over the past three months.”

“It almost seems as if the Canadian real economy is slowly recovering from the problems in its relationship with the US. However, this recovery is on shaky ground. The US president has announced new tariffs of 50% on certain Canadian goods if no agreement is reached by August 19th.”

“We nevertheless continue to expect that an agreement on a one-year extension of USMCA will ultimately be reached. Although the US president regularly claims that only Canada would benefit from it, the two economies are too closely intertwined for a possible termination not causing major problems. But it is clear that any diversification by Canada away from its largest trading partner, the US, will be a lengthy process.”

“We remain optimistic that the Canadian dollar will finally start to appreciate again in the coming months, but it will likely be a long road, with setbacks caused by the US president along the way.”