Canadian Dollar edges higher amid trade tensions and weak US Dollar

• The Canadian Dollar strengthens modestly against the US Dollar, with USD/CAD hovering around 1.3750.
• Fitch Ratings warns of a weaker Canadian consumer outlook amid labor market and trade headwinds.
• The BoC is expected to cut rates to 2.25% by year-end, but elevated core inflation clouds the outlook.

The Canadian Dollar (CAD) is trading with a mild bid tone against the US Dollar (USD) on Wednesday, albeit within a narrow range, as the Greenback remains on the defensive but holds firm near the lower end of its range established following last week's Nonfarm Payrolls (NFP) report.

A subdued US Dollar, a mildly supportive risk tone, and stable oil prices are offering modest support to the Loonie. However, the absence of fresh fundamental catalysts is keeping directional conviction limited, leaving the USD/CAD pair largely at the mercy of trade-related developments.

The USD/CAD pair pulled back sharply after marking a fresh multi-month high of 1.3879 on August 1 -- its strongest level since May 22 -- as the Greenback came under pressure following a weaker-than-expected US jobs report. Since then, price action has turned broadly subdued, with the pair lacking clear directional momentum. At the time of writing, USD/CAD is trading slightly lower near 1.3744 during American trading hours, little changed on the day.

Fitch Ratings, in a report published on Tuesday, August 5, flagged a weakening outlook for Canadian consumers amid a cooling labor market and persistent trade headwinds. According to Fitch's latest Canada Consumer Monitor, consumer spending rose just 0.2% in Q1 2025, following a robust second half of 2024. The agency projects annual spending growth to moderate to 2.0% in 2025 and slow further to 0.7% in 2026, amid softening demand for durable goods and stagnating services consumption. Business surveys and employment data point to reduced hiring and job losses, particularly in export-driven sectors, as sentiment is further dampened by heightened trade uncertainty with the US.

The agency also forecasts household spending growth to decelerate to 2.0% in 2025 and slow further to just 0.7% in 2026, citing soft employment gains and rising trade-related uncertainty. Adding to the downside risks, Fitch projects that the effective US tariff rate on Canadian exports could climb to 10.0% this year, a move likely to weigh further on consumer and business confidence. While the Bank of Canada (BoC) opted to hold interest rates steady at its most recent policy meeting, it is expected to lower the benchmark rate to 2.25% by year-end. However, the easing path remains uncertain as core inflation continues to linger near 3%, well above the BoC's 2% target.

Looking ahead, market focus will shift to key Canadian data releases later this week. The Ivey Purchasing Managers Index (PMI) for July is due on Thursday. On Friday, attention turns to the July labor market report, including the Unemployment Rate, Net Change in Employment, Participation Rate, and Average Hourly Wages (YoY). The previous report showed a robust 83.1K job gain and wage growth of 3.2% YoY. Any signs of labor market cooling or wage softening could reinforce expectations for rate cuts by the Bank of Canada, potentially weighing on the Loonie.