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Canadian Dollar Set to Recover, but US Trade Risks Remain, Commerzbank Says

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The Canadian dollar looks increasingly well-positioned for a recovery as the economy shows signs of gaining momentum, according to Commerzbank Research in a Monday note.

Friday's Labour Force Survey (LFS) delivered a significant upside surprise, with around 75,000 jobs added versus the 20,000 consensus forecast. At the same time, the unemployment rate fell to 6.4%, its lowest level in two years, said the bank.

The stronger LFS reinforces signs of a broader recovery in the Canadian economy, with gross domestic product beating expectations for a second consecutive month, manufacturing PMI remaining in expansion territory and exports continuing to improve, added Commerzbank.

However, the recovery remains vulnerable to US trade policy. President Donald Trump has threatened 50% tariffs on certain Canadian goods if no agreement is reached by Aug. 19. While the bank continues to expect a one-year extension of the US-Mexico-Canada Agreement (USMCA), repeated tariff threats have weighed on confidence and repeatedly undermined signs of stronger Canadian growth.

"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," wrote Commerzbank FX Analyst Michael Pfister in the note.

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