Investing.com — Canada’s weakening currency could complicate the Bank of Canada’s interest rate outlook if the U.S. dollar strengthens further, particularly as trade tensions threaten domestic growth, CIBC Capital Markets economist Avery Shenfeld said.
The Canadian dollar has lost about 5% of its value against the Bank of Canada’s trade-weighted currency basket since early summer 2025. Historical models suggest the depreciation could add around 0.3 percentage points to inflation at its peak impact, although some of the pressure has already fed through to consumer prices.
The currency’s decline could become more pronounced if the Federal Reserve raises interest rates while the Bank of Canada holds borrowing costs steady. A weaker loonie makes imports more expensive, potentially adding to inflation, but can also support exports by making Canadian goods more competitive abroad.
Still, CIBC said the inflationary consequences may not be enough to force the Canadian central bank to raise rates if currency depreciation produces only a temporary increase in prices rather than a broader inflationary trend. The bank must also weigh mounting economic risks from U.S. tariffs and weakening domestic demand.
Canada’s annual inflation rate is expected to rise to 3.2% in September from 3.0% in August, largely reflecting higher gasoline prices, CIBC forecast. Core inflation measures are expected to remain closer to 2%, supporting the case for the Bank of Canada to leave interest rates unchanged.
A further escalation in Canada-U.S. trade tensions, including a threatened 50% U.S. tariff on Canadian autos and parts from January 1, could put additional pressure on the economy. If oil prices also decline, weaker growth could prompt the Bank of Canada to consider cutting rates next year, potentially putting further downward pressure on the currency.
CIBC cautioned that a weaker loonie would offer only limited relief to exporters, as many Canadian manufacturers rely on inputs priced in U.S. dollars. Any improvement in competitiveness would likely be concentrated in industries not directly affected by tariffs.
The bank said investors should watch the broader U.S. dollar index alongside the Canadian currency to assess whether exchange-rate pressures could materially influence upcoming Bank of Canada decisions.
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