The Bank of Canada’s Q2 Business Outlook Survey shows that the impact of tariffs on business outlooks is less severe than in Q1. The Business Survey Indicator dropped slightly from -2.12 in Q1 to -2.42 in Q2. Firms are less worried about extreme tariff situations, but tariffs and uncertainty still significantly influence their views.

Investment And Employment Plans

Many companies plan to keep their current workforce and limit new investments to maintenance over the next year. Businesses focused on exports expect fewer extreme tariff events than in Q1. A steady 23% of firms believe inflation will stay above 3% for the next two years. Additionally, 43% expect labor costs to decrease, while 9% anticipate an increase. Consumer inflation expectations for the next five years rose slightly to 3.45%, up from 3.39% in Q1. About 24% of firms reported a drop in sales, down from 28% in Q1. Furthermore, 28% expect a recession in Canada, a decrease from 32%. The future sales indicator balance decreased from +22 in Q1 to -6. The USDCAD exchange rate has been volatile but remains around the 200-hour moving average. The next target is the 38.2% retracement level at 1.36902, with more selling potential below that. The business outlook survey presents a mixed picture. Firms are less fearful but are also not planning to invest or hire extensively. This opens opportunities for traders looking for a stronger Canadian dollar. The report’s technical breakdown under the 200-hour moving average signals action.

Macroeconomic Factors

We think this bearish view on USDCAD is supported by recent macroeconomic data. For example, Canada’s job market surprised with an increase of 90,400 jobs in April 2024, much more than expected. This strong employment may limit the central bank’s ability to lower interest rates soon, helping the currency. While survey participants expect high inflation, Canada’s annual inflation rate slowed to 2.7% in April, providing the central bank with some leeway. This contrasts with the U.S., where persistent price pressures remain a key concern for monetary policymakers. This difference in monetary policy is a major reason we believe the currency pair will decline. With this outlook, we are positioning through derivatives for further drops in USDCAD. This could mean buying put options or shorting futures contracts, targeting the 38.2% retracement level around 1.3690. The 200-hour moving average near 1.3785 is crucial as a stop-loss level, as Michalowski suggests. Typically, significant currency levels that break often see a retest before a further move continues. Thus, we should brace for potential price fluctuations and use any rallies back toward that critical moving average to enter short positions. If the level holds and moves above it, our bearish outlook is invalidated. Create your live VT Markets account and start trading now.

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