Wednesday 7 October 2026

August’s $4.2 billion trade surplus is borrowed from September, not earned. We expect it to narrow sharply in the next release, and we would not read it as a sign that tariffs are being absorbed painlessly.

Why we think so. Exports rose 2.5% in August while imports fell 2.0%, lifting the surplus from $787 million in July. The detail shows where the strength came from. Exports to the United States climbed 8.1% and the US surplus nearly doubled to $11.2 billion from $6.1 billion, the largest one-month improvement on record, while exports to other countries fell 8.5% from July’s record. A new round of 50% US tariffs on hundreds of Canadian goods took effect on 22 August, and American buyers pulled orders forward to beat it. Orders placed early are orders that will not be placed later, so the same goods that inflated August will be missing from September and October. Price also played a part: energy products, led by diesel, supplied more than a quarter of the export gain, and petroleum-based energy prices are up more than 50% from a year ago. That portion reflects a supply shock abroad rather than demand for Canadian output.

What the market is pricing. Economists at CIBC and RBC both expect the surge to reverse in September, so our call sits with the consensus. The difference is one of emphasis. We think the headline will flatter the economy the Bank of Canada judges on 28 October, and that the Bank will read it the way forecasters do: as a timing effect that says the underlying picture is weaker than it looks. That argues for patience at the Bank rather than optimism.

What it means. A one-month surplus does not change a household budget directly, but it shapes two things that do: the Canadian dollar, which closed near 70 US cents, and the Bank’s reading of the economy, which sets the floor under variable borrowing costs. For business owners who sell into the US, August is a reminder that tariff deadlines move order books. Revenue that arrives early will not arrive later, so cash planning for the fourth quarter should assume a quieter September and October. A firm that invoices in US dollars can check whether an August receivables bulge has already been converted, and at what rate, before deciding how much currency exposure to hedge for the rest of the year. For owner-managed businesses, lumpy export revenue also raises the question of how much operating cash to keep in reserve, and how to smooth taxable income across years so that one strong month does not distort a tax bill.

What would change our mind. A September trade report showing exports to the US holding near August levels after the 22 August tariffs took effect. That would mean American importers are absorbing the duty rather than cutting volumes, and that the tariff damage is smaller than we assume.

What to watch. The September jobs report on 9 October, for any sign of export-sector layoffs; September CPI on 19 October; the Bank of Canada decision on 28 October; and the September trade report, the first full month with the new tariffs in force.

Canada’s September CPI prints at or above 3% on 19 October, keeping the Bank of Canada from cutting even as growth slows. The Ivey survey says activity is cooling while the cost pressure behind inflation is still building.

Why we think so. The Ivey Purchasing Managers Index fell to 58.2 in September from 64.3 in August. A reading above 50 still means activity expanded, just more slowly. The price detail is what matters for inflation. The prices index rose to 82.8 from 80.4, meaning more than four in five purchasing managers reported paying more. Supplier deliveries slowed, with that index at 39.2, and when deliveries slow, buyers usually pay up to secure goods. Purchasing managers see cost pressure months before it reaches a grocery receipt or a contractor’s quote, because they are buying the inputs that finished goods are made from. Combine a prices index in the 80s with oil above US$100 and a dollar near 70 US cents, which raises the Canadian price of anything bought in US dollars, and the evidence points to goods inflation that is broadening rather than fading. The employment index edged up to 56.5 from 55.0, so firms are not yet cutting staff.

What the market is pricing. Economists expected the headline index at 65.2, so activity disappointed by a wide margin. A miss of that size would normally strengthen the case for lower rates. We think the prices component outweighs it. A central bank can tolerate slower growth more easily than rising input costs, because the second feeds into future inflation. That is why a weaker survey does not, in our view, bring a cut closer.

What it means. For small business owners, input costs are still rising and suppliers are slower, so pricing and inventory decisions for the holiday season need to allow for both. Comparing current supplier quotes with invoices paid in the first half of the year shows which cost lines moved most and whether any can be locked in. For households, persistent inflation changes the real return on cash: money set aside for more than a year or two should earn interest that keeps pace with prices, which is the case for comparing high-interest savings with GIC terms. For borrowers, a CPI at or above 3% means no relief from the Bank this autumn.

What would change our mind. The Ivey prices index dropping below 75 in October, or a CPI ex-gasolineCPI ex-gasoline The Consumer Price Index with gasoline removed. When it sits well below the headline rate, the inflation is coming from fuel rather than from the broad economy. reading falling toward 2.5%. Either would tell us the price pressure is narrower than the headline suggests, and the case for a cut would return.

What to watch. The New York Fed’s survey of consumer inflation expectations today, where about 3.7% is expected for the one-year measure against 3.6% before; Canada’s September CPI on 19 October; the October Ivey survey; and the Bank of Canada decision on 28 October.

The loonie stays in a 69 to 72 US cent band until either the Bank of Canada signals a change in direction or trade talks restart with a date attached. Neither is in view this month.

Why we think so. The Canadian dollar closed at 70.29 US cents on 6 October, near the low end of its range this year, with one US dollar buying about $1.42 to $1.43 Canadian. Two forces hold it there. The first is the gap between US and Canadian interest rates. The US 10-year Treasury trades near 5.3% while the Canadian 10-year is 3.92%, and the Fed’s range of 3.75% to 4.00% sits well above the Bank of Canada’s 2.25%. Money tends to flow toward the higher-yielding currency, so as long as that gap stays wide the loonie struggles to rally. The second is trade. On 5 October President Trump said he was in no hurry to resume talks with Canada and set no timetable. Canada’s dollar-for-dollar counter-tariffs took effect in September and the formal CUSMA review falls this year. Without a date for talks, investors have no event to buy ahead of.

The bigger picture. A weak currency normally helps an exporter by making its goods cheaper abroad, but tariffs blunt that benefit, so Canada gets less of the usual cushion while still paying more for imports. That is why the dollar now matters for inflation as well as for travel budgets: imported food and goods cost more, and that shows up in the price data that keeps interest rates high.

What it means. A weak loonie is a quiet tax on Canadian consumers. A US$1,000 flight, a software subscription or a winter stay in Arizona costs about 42% more in Canadian dollars than its face value. Anyone with a known US-dollar expense in the next six months, such as a tuition payment, a property tax bill or a planned trip, can price it in Canadian dollars at today’s rate and decide whether to buy part of the US dollars now rather than all at once later. For investors, a portfolio heavy in US holdings has gained from the loonie’s slide, and that currency gain is worth measuring separately from the market return, because it can reverse even if markets do not.

What would change our mind. Today’s Fed minutes and Friday’s jobs data pushing US yields down faster than Canadian yields, narrowing the spread that is doing most of the damage. A restart of trade talks with a fixed date would also lift the dollar above our band.

What to watch. The FOMC minutes today at 11:00 PT; the US 10-year Treasury auction this morning; the September jobs report on Friday 9 October; the Bank of Canada decision on 28 October; and any timetable for Canada-US talks ahead of the CUSMA review.