For much of the pandemic-era, the Canadian and US economies were mirror images of each other but cracks are beginning to show. Canadian CPI today highlighted differing inflation dynamics as the first two months of 2024 have shown Canadian pricing falling faster than expected while US prices have surprised to the upside.
US vs Canada CPI
There are a few critical differences in the neighbours going forward to consider:
- US fiscal spending is significantly higher than Canada with CHIPS and IRA spending to continue through 2025
- Canadian house prices are relatively much higher and with variable rate mortgages, the pain of higher rates is much worse
- US tech dominance is a tailwind for US employment that’s absent in Canada
- Canadian immigration is running dramatically higher than in the US, relative to population
So far, immigration is masked Canadian economic weakness but it’s not entirely bullish. It’s helped to restrain wage growth and that’s kept a lid on prices. There has also been a 180-degree turn in Canadian attitudes towards immigration and that’s causing a reversal in human imports, particularly students, that could be a drag.
Finally, Canada had a business support program that ended in January and that’s resulted in a surge of business insolvencies that could weigh on activity.
The biggest one is interest rates though and I expect we will continue to see slowing Canadian spending in the months ahead, eventually leading to layoffs. Some of the Canadian dollar weakness right now is masked by higher oil prices and positive risk sentiment but at some point that will reverse and leave the loonie in the crosshairs.
For now, it’s all about the technicals. USD/CAD has edged above the 2024 high of 1.3606 but hasn’t run through it. If the dam breaks, we could see a quick move up to 1.3800.
USDCAD weekly chart