Written by the Market Insights Team
Temporary boost fuels Canada’s economic expansion
Kevin Ford – FX & Macro Strategist
Canada’s economy grew at an annualized rate of 2.2% in Q1 2025, closely mirroring the revised 2.1% expansion in the previous quarter (down from an initial 2.6%). While this suggests stability on the surface, the underlying factors paint a more nuanced picture. Much of the growth was driven by businesses stockpiling inventories ahead of anticipated tariffs and a sharp uptick in machinery investment, both of which are unlikely to be sustained in the months ahead.
Trade activity also showed signs of softening. Export growth remained positive but was largely fueled by companies front-loading purchases of machinery and autos in preparation for potential disruptions. This means that inventory accumulation and trade, rather than broader economic momentum, were the key drivers of growth.
Meanwhile, household spending weakened noticeably, particularly in services, a stark departure from the robust gains of the past four quarters. Residential investment also took a sharp downturn, reversing much of the late-2024 rebound. Uncertainty around trade policy and broader economic conditions continues to weigh on housing activity.
Non-residential investment remained positive, though growth slowed compared to the previous quarter. A surge in machinery and equipment investment helped offset declines in structural investment, but the sustainability of this trend remains in question.
Looking ahead, while Canada’s economy continues to expand, much of the recent strength has been tied to temporary factors. The downward revision of Q4 2024 growth from 2.6% to 2.1% reinforces a sense of caution. Preliminary data from April suggests the expansion is continuing (+0.1% m/m), but the risk of near-zero growth in the second quarter remains significant.
Can the CAD go 5 in a row?
Kevin Ford – FX & Macro Strategist
The CAD just wrapped up its strongest four-month streak since 2021, closing Friday at 1.373. Will it extend to five months? The last time it posted five consecutive months of gains against the USD was back in April 2020, a similar price pattern that saw it surge to 1.467 before pulling back to 1.30.
What stands between the CAD and next key support at 1.35? The loonie’s 2-year average aligns closely with key support at 1.37, reinforcing its technical significance. Short-term price action continues to be dictated by movements in the US dollar, where persistent bearish positioning remains overstretched. A contrarian view would suggest that the overstretched positioning against the USD is poised for a pause at least, potentially putting a floor on the CAD.
However, as June kicks off, the USD/CAD has hit a fresh 2025 low at 1.3675, testing the 1.37 support level. A decisive daily close below this mark could signal additional weakness in the US dollar.
Meanwhile, President Trump’s recent decision to raise steel and aluminum tariffs injects fresh uncertainty into Canada’s economic outlook. As a leading exporter of both metals to the U.S., Canada could see mounting pressure, potentially dampening broader market sentiment. However, the CAD has largely shrugged off these sector-specific levies, showing little reaction to their immediate impact.
High bar for sustained dollar weakness
George Vessey – Lead FX & Macro Strategist
The initial boost to the US dollar from the Federal Trade Court’s ruling against Trump’s tariffs quickly faded as a federal appeals court granted a stay on the ruling until 9 June, keeping tariffs in place for now. Moreover, markets shifted focus to Section 899 of the “One Big, Beautiful Bill” as US policy uncertainty remains a key overhang.
Adding to renewed trade tensions with China, this could be another growing challenge for the US dollar. Section 899, if passed through the Senate, would allow the US to tax companies and investors from countries deemed to have “unfair foreign taxes”, such as digital services taxes or rules on under-taxed profits. This could effectively act as a capital account tax, at a time when investor confidence in US assets is already shaky. A policy that reduces foreign investors’ returns on US holdings would likely dampen capital inflows, further driving away foreign investors from US assets, including the dollar, already weakened by Trump’s unpredictable trade moves and worsening fiscal conditions.
However, there are still uncertainties around the bill’s final form. It has yet to clear the Senate, and key details remain unresolved. First, it’s unclear if income from US Treasuries will be exempt. Second, S899 would primarily target countries like the EU, UK, Australia, and Canada, while Middle Eastern and Asian nations, home to large global reserves, are seemingly excluded.
Market positioning already reflects broad scepticism toward the dollar, but the scale of additional bearish shifts may be constrained. Traders remain focused on tariff developments, fiscal policy, and global trade negotiations, but much of the negative USD sentiment may be priced in. The dollar’s direction this week will continue to be driven by developments with the court ruling on tariffs, but a slew of economic data will also be key. The May jobs report on Friday will be closely watched, especially for signs of Liberation Day’s impact on hiring and whether DOGE spending cuts are starting to weigh on federal employment.
Euro’s path hinges on ECB and market momentum
George Vessey – Lead FX & Macro Strategist
The European Central Bank’s (ECB) upcoming meeting on Thursday is drawing attention, as recent developments in trade and tariffs have slightly increased the possibility of a pause. However, a downward revision to inflation forecasts and the earlier-than-expected drop in headline inflation to below 2% suggest that the balance is tilting toward a 25 basis-point rate cut. Inflation risks continue to weigh on the outlook, reinforcing expectations for monetary easing.
Eurozone inflation data due on Tuesday is expected to show a decline to 2.0% in the headline print for May. This drop is largely due to falling energy prices and a reversal of last month’s core inflation spike, which had been inflated by Easter-related holiday and leisure costs. With core inflation likely returning to 2.5%, policymakers may see further justification for easing. A rate cut could exert downward pressure on the euro, though much depends on how aggressively markets price in future ECB policy moves.
A dovish ECB, combined with cooling trade tensions and legal battles, could drive EUR/USD lower in the near term. However, the pair has reclaimed its 21-day moving average, which is starting to slope upward, suggesting positive momentum may be rebuilding for the euro. The options market and positioning trends indicate that traders are still favouring euro strength, though short-term volatility remains a risk.
US Dollar DXY index back below 99
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 2-6
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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