Inflation in Canada fell in July, but there are well-founded concerns that it could start rising again. The industrial product price index, instead of the expected decline, increased, as did the raw materials price index; retail sales remain persistently high. In other words, in addition to the factors that keep alive the threat of renewed inflation growth due to tariffs and Canada's retaliatory duties, there are now further factors at play.

Bank of Canada Governor Macklem stated on Tuesday that the Bank will not review its 2% inflation target next year when it updates its monetary policy. The central bank and the Canadian Ministry of Finance reexamine the inflation target every five years, and the next review is due next year. Macklem said the 2% level has proven effective for achieving price stability.

The BoC has been aggressively cutting rates recently, bringing them down to 2.75%. Since higher US tariffs add uncertainty and could potentially fuel inflation, Macklem's cautionary statement seems unusual—unless Canada and the US are close to reaching a trade agreement. Prime Minister Carney confirmed this by announcing that, as of September 1, some retaliatory tariffs on American goods will be dropped. The coordinated positions of Macklem and Carney signal reduced uncertainty and aim to calm the markets, which in itself has a stimulative effect.

On Thursday and Friday, data will be released on the current account and GDP growth rates. Second-quarter GDP is expected to decline by 0.3%, and the balance of payments is anticipated to deteriorate sharply—factors that could significantly pressure the Canadian dollar and the Bank of Canada toward yet another rate cut.

Because inflation is also declining, the Bank of Canada—which the market believes is aiming for a pause—will have difficulty justifying that pause.

Of course, the Bank of Canada would like to avoid a scenario where slowing GDP growth, a sharp deterioration in the trade balance, and a simultaneous surge in inflation risks create a synergy effect, leaving it in a tough spot. That's why Macklem's and Carney's remarks are forced moves, intended to alleviate at least some uncertainty.

In any event, factors contributing to the weakening of the loonie are mounting, especially considering July's inflation slowdown. A weaker currency will make imports more expensive, stoking further inflation fears, so Macklem's and Carney's verbal interventions can be seen as attempts to prevent a steep drop in the loonie after the release of weak data on Thursday and Friday.

The net short position on CAD increased by $171 million over the reporting week, to $6.71 billion; speculative positioning is confidently bearish, with the fair value above the long-term average and pointing toward further gains (in USD/CAD).

Jerome Powell's speech at Jackson Hole halted the rise in USD/CAD right at the edge of the channel—this test was anticipated in our previous review. The pullback was shallow, and, apparently, the pair is gathering strength for further gains. We expect the nearest resistance zone at 1.3925/50 will not hold, after which growth will continue toward 1.4017.