USDCAD: Growth Surprises, Trade Pressures, and Policy Pivots

Markets are navigating a complex mix of economic signals this week, with Canadian growth surprising to the upside even as its manufacturing sector contracts further under tariff pressure. South of the border, US manufacturing continues to lose momentum, and JPMorgan CEO Jamie Dimon is sounding the alarm on America’s growing fiscal risks. Meanwhile, all eyes turn to the Bank of Canada’s upcoming rate decision as policymakers balance inflation, trade tensions, and slowing global demand. In the FX market, USDCAD remains under pressure, with technical indicators tilted toward further downside.

Canada’s Q1 Growth Surges on Pre-Tariff U.S. Buying Spree

Canada’s economy grew by an annualized 2.2% in the first quarter of 2025, outperforming expectations, primarily due to a surge in exports. This uptick was driven by US companies rushing to import Canadian goods ahead of new tariffs imposed by President Donald Trump. However, underlying domestic indicators were weaker: household spending slowed, final domestic demand stagnated, and imports rose, leading to inventory buildup.

The GDP rose 0.1% in March following a 0.2% contraction in February, with growth fueled by rebounds in resource extraction and construction. Analysts had expected just 1.7% quarterly growth. The Canadian dollar strengthened, and bond yields edged up. The data came just ahead of the Bank of Canada’s rate decision, with markets now heavily favoring a pause.

Tariffs Drag Down Canadian Manufacturing for Fourth Straight Month

Canada’s manufacturing sector remained in contraction for the fourth consecutive month in May, with the S&P Global Manufacturing PMI at 46.1. Although slightly better than April’s reading, the index stayed below the 50.0 threshold, signaling ongoing decline. Output and new orders continued to fall sharply, largely due to the impact of US tariffs and persistent trade uncertainty.

Employment dropped at the steepest rate since mid-2020, while purchasing activity and inventories were further reduced. Firms also faced growing input costs, supply delays, and soft international demand—especially from the US. Despite some hopes for stabilization, business confidence stayed subdued amid unresolved trade tensions.

BoC Poised to Hold Rates Amid Inflation and Trade Pressures

The Bank of Canada will announce its next interest rate decision on Wednesday, June 4—its first since Prime Minister Mark Carney’s snap election victory. After holding the policy rate at 2.75% in April, experts expect the central bank to keep rates steady again, citing stubborn core inflation despite a lower headline CPI driven by temporary gas price declines.

The BoC is also navigating ongoing trade tensions with the US and growing recession risks, as GDP is expected to contract in the near term. While more rate cuts are likely later in 2025, the central bank is expected to proceed cautiously for now.

US Manufacturing Slips Again as Orders, Imports, and Jobs Decline

US manufacturing activity contracted for the third straight month in May, with the ISM Manufacturing PMI slipping to 48.5, down slightly from April’s 48.7. While the overall economy remains in expansion, the manufacturing sector continues to face broad-based weakness.

New orders, production, backlogs, employment, and inventories all contracted, though some indicators—like backlogs and employment—declined at a slower pace. Export and import orders dropped sharply, with imports hitting their lowest level in months. Rising prices and slower supplier deliveries persisted, partly due to tariff-related pressures and port delays.

Only two of the six largest manufacturing industries grew in May—Petroleum & Coal Products and Machinery—while most others, including Food, Chemicals, and Transportation Equipment, contracted. Despite some signs of stabilization, the sector remains under pressure from trade uncertainty and weak demand.

Technical Analysis

Since reaching a high of 1.47920 on February 2, USDCAD has been trending lower, driven by the impact of US tariffs along with a combination of technical and fundamental pressures. The pair continues to trade below both the 20- and 50-period Exponential Moving Averages (EMAs), which are downward sloping, signaling sustained bearish momentum.

Technical indicators reinforce the negative outlook. The Momentum Oscillator remains below the 100 level, indicating ongoing selling pressure, while the Relative Strength Index (RSI) is positioned below the 50 mark, suggesting strong downside participation.

If current conditions persist, downside targets to monitor are 1.35769, 1.34015, and 1.32261. Alternatively, a shift in sentiment and renewed buying could bring the focus to potential resistance levels at 1.38607, 1.40154, and 1.41634. Until then, the technical bias remains firmly bearish.

Jamie Dimon Warns: Debt Surge Risks Bond Market Shock

JPMorgan Chase CEO Jamie Dimon has raised concerns about the US government’s growing national debt and budget deficits, warning that they could eventually trigger a bond market disruption. With the debt surpassing $36 trillion and annual deficits approaching $2 trillion, Dimon said the issue is serious and likely to have consequences—though the exact timing is uncertain.

He urged a focus on economic growth through pro-business policies, streamlined regulations, improved permitting, and better education and job training. Dimon also called for sensible reforms to federal programs to reduce waste and fraud without harming vulnerable groups.

His comments come as rising interest payments and entitlement costs drive deficits higher, leading to a recent US credit rating downgrade. Dimon emphasized that while reforms won’t be easy, they are essential to avoiding future financial strain.

Conclusion

As markets digest a mixed bag of growth surprises, manufacturing weakness, and rising fiscal concerns, the spotlight now turns to policy responses. The Bank of Canada’s upcoming rate decision will test its ability to balance inflation pressures with deteriorating trade and industrial data. Meanwhile, investors remain cautious, with Jamie Dimon’s warning underscoring the broader risks building in the background. With USDCAD under persistent pressure and sentiment fragile, traders and policymakers alike face a challenging environment shaped by both domestic fundamentals and global uncertainty.