Canadian Dollar: Trade War Clouds Q2 GDP Rebound – BBH

The Canadian dollar faces renewed headwinds as trade war risks overshadow a stronger-than-expected Q2 GDP rebound, according to Brown Brothers Harriman (BBH). As of August 2025, the loonie has struggled to hold gains despite positive growth data, with analysts pointing to escalating trade tensions as the primary drag on the currency.

Q2 GDP Rebound: A Silver Lining?

Canada’s economy showed resilience in the second quarter, with GDP growth rebounding at an annualized rate of 2.2%, according to Statistics Canada. This marks a significant improvement from the 1.7% contraction in Q1, driven by strong consumer spending and a rebound in exports. However, BBH strategists caution that this momentum may be short-lived as the trade war with major partners continues to cloud the outlook.

The growth figure, released in late August, initially supported the Canadian dollar, but the currency quickly gave back gains as investors focused on the broader trade conflict. The U.S.-Canada trade relationship remains tense, with ongoing disputes over softwood lumber, dairy, and automotive tariffs. These unresolved issues have created an uncertain environment for businesses and investors, undermining the positive GDP data.

Trade War: The Persistent Overhang

The trade war remains the single largest risk to Canada’s economic outlook. The U.S. has imposed tariffs on Canadian steel and aluminum, and there are threats of further actions on autos and other sectors. In retaliation, Canada has imposed its own tariffs on U.S. goods, but the escalation has not resolved the underlying tensions.

BBH analysts note that the trade war is not just a bilateral issue; it also affects Canada’s ability to diversify its export markets. While Canada has signed new trade agreements, such as the CPTPP and CETA, these have not fully offset the impact of U.S. tariffs. The uncertainty is also weighing on business investment, which remains subdued despite the overall GDP growth.

Impact on the Canadian Dollar

For the Canadian dollar, the trade war has been a double-edged sword. On one hand, higher commodity prices, particularly oil, have provided some support. On the other hand, the risk of prolonged trade disputes has kept the currency under pressure. The loonie has traded in a narrow range against the U.S. dollar, but analysts expect volatility to increase as trade negotiations continue.

Investors are closely watching the Bank of Canada’s monetary policy stance. The central bank has held interest rates steady, but if trade tensions escalate further, it may be forced to consider rate cuts to support the economy. This would likely weaken the Canadian dollar further.

Conclusion

While Canada’s Q2 GDP rebound is a positive sign, the trade war remains a significant risk that could derail economic recovery. The Canadian dollar is likely to remain sensitive to trade headlines, and investors should be prepared for continued volatility. BBH’s assessment underscores the importance of monitoring trade policy developments as they will be crucial in determining the loonie’s trajectory in the coming months.

FAQs

Q1: How did Canada’s Q2 GDP perform?
Canada’s Q2 GDP rebounded at an annualized rate of 2.2%, following a 1.7% contraction in Q1, driven by consumer spending and exports.

Q2: Why is the trade war affecting the Canadian dollar?
The trade war creates uncertainty for businesses and investors, weighing on economic growth and the currency. Tariffs on Canadian goods and the risk of further escalation undermine confidence.

Q3: What is the Bank of Canada’s stance on interest rates?
The Bank of Canada has kept rates steady, but may consider cuts if trade tensions worsen, which could further weaken the Canadian dollar.