Widening global imbalances in trade and other economic flows pose a growing risk to financial stability that could “sideswipe” countries such as Canada despite their relatively stable policies, Bank of Canada Governor Tiff Macklem warned Monday.

In a speech to the Chambre de commerce France-Canada in Paris, Macklem said that imbalances were growing at a time when the financial system was also evolving and becoming faster and less regulated.

“That leaves us with two clear risks,” he said. “First, large capital inflows into the United States could once again be misallocated — stretching valuations in equities and credit and setting the stage for a painful correction. Second, those flows could reverse suddenly. Either outcome could send stress far beyond U.S. borders.”

The G7 has been studying the topic of imbalances and the potential risks they pose. Macklem’s speech followed a March memo in which G7 economists said that excessive current account deficits and surpluses reflected increasingly unbalanced domestic growth dynamics in China, the European Union and the U.S. China, they said, has chronically low domestic consumption, the EU has persistent weak levels of productivity and the U.S. has fiscal deficits that are too large relative to economic conditions.

The memo noted that balanced growth and reciprocal trade were fundamental to a well-functioning global economy.

In his speech, Macklem noted that trade surpluses and deficits are normal, but if they are not addressed they can become excessive and in turn distort financial flows between countries, exacerbating political tensions and setting the stage for potential shocks.

“Canada is not a contributor to excessive global imbalances, but we are being knocked by increased trade tensions, and we could be sideswiped if financial stability risks crystallize,” he said, according to prepared remarks for the speech. “A better path would be to adjust the system before pressures reach a tipping point.”

Macklem said the first step is for deficit countries and surplus countries to agree on the problem: that global imbalances are rooted in domestic imbalances. China needs to consume more, the U.S. needs to save more and the EU needs to invest more. Addressing domestic imbalances will be beneficial to everyone, and adjustment will be smoother and more durable if it is coordinated.

“The common thread is clear: when adjustment is delayed, imbalances persist, growth is held back and risks build across the global system,” Macklem said.

The Bank of Canada governor listed three ways countries can work together to reduce global imbalances and protect financial stability.

For one, countries like Canada and the EU should deepen trade and investment relationships even as the U.S. pulls back from open trade. An open global system allows capital to grow, supports economic growth and helps economies adjust to changes in supply and demand.

The world can also create more places for global savings to go so the system is more balanced and resilient, which means developing more safe assets and creating payment systems that are safe and efficient for all currencies. Currently, a huge share of global savings are pulled disproportionately to one direction: the U.S.

Finally, countries need to work together to increase transparency in the global financial system. This means better data collection and regular stress testing to see how interconnected everything is. Entities like the International Monetary Fund, the Financial Stability Board and the Bank for International Settlements need to work together to point out risks earlier.

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“We should not let pressures continue to build. And we should not repeat the mistakes of the interwar years. We can still support open trade and investment, deeper ties and stronger cooperation — so that we can adjust earlier and build a more resilient global system,” Macklem said.

“I’ll end with a simple point: resilience is a choice. It doesn’t happen automatically, and it doesn’t come from good intentions. It comes from reinforcing systems so they don’t break in times of stress.”

One city is bucking the trend as housing affordability improves across the country: Quebec City.

The average household income required to service an average mortgage in Quebec’s capital has climbed 1.6 per cent since 2024, making it the only one of Canada’s 62 biggest cities to experience a deterioration of affordability over the two years, according to a recent survey from Royal Lepage.

The city has also recorded the highest year-over-year aggregate home price increase over the past eight consecutive quarters.

Phil Soper, chief executive of Royal LePage , said the slow demand in the major cities such as Toronto, Vancouver and Montreal has people moving to affordable regions.

“Over the past two years, home prices in Canada’s major urban centres — particularly Toronto, Vancouver and their surrounding communities — have softened, as demand in these higher-cost regions has been tempered by geopolitical and economic uncertainty, reduced immigration levels and an unprecedented increase in supply,” he said in the report. “At the same time, cities where home prices are lower have seen more robust demand as buyers seek an entry point into the market, pushing prices up as a result.”

Overall affordability includes a number of factors, including cost of living and the local economy, both of which can greatly vary from one city to the next.

Lethbridge, Alta., is the most affordable city in the country, with about 18.9 per cent of the average household’s monthly income required to service a mortgage payment.

Saint John, N.B., came in second at 19.6 per cent, while Thunder Bay, Ont., at 20.3 per cent, Red Deer, Alta., at 24.9 per cent and Regina at 25 per cent rounded out the top five. Edmonton at 26.3 per cent and Winnipeg at 27.9 per cent also cracked the top 10.

Quebec City had previously cracked the top 15 most affordable cities in 2024, but fell to 18th this time with an affordability factor of 32.4 per cent.

It’s clear that secondary cities are offering the biggest deals at the moment and most prospective homebuyers are taking notice. More than half of the respondents to Royal Lepage’s survey would move to one of the 15 most affordable cities if they could find a job or work remotely.

“Home prices in Canada’s largest cities have moderated over the past couple of years, but for many buyers, the math still doesn’t work,” Soper said. “As barriers to entry remain high in the country’s most expensive urban centres, relocating to a more affordable city is becoming less of a last resort and more of a deliberate strategy. Aspiring homeowners who cannot secure a foothold in these markets are seriously weighing their options.”

Still, moving to a more affordable city may sound attractive in principle, it becomes much harder in reality.

“Many people dream about relocating to a more affordable city or province, yet the number that actually relocate is smaller,” he said. “Career opportunities, family obligations and established social networks are powerful forces.”

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Canada’s inflation rate hit 3.2 per cent in May, as high gas prices drove up overall inflation.

Gas prices climbed 33.2 per cent in the month, as the war in Iran halted oil shipments along the Strait of Hormuz. The rise was the largest gain in gas prices since July 2022.

While gas prices are the headliner, food prices also climbed 4.3 per cent in May, while shelter prices rose 1.7 per cent and air travel rose 7.4 per cent.

The inflation figures now have economists expecting the Bank of Canada to hold interest rates at its next announcement.

Read more here.

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McLister on mortgages

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Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Ben Cousins with additional reporting from Financial Post staff and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com .

• HST rebate helps drive Toronto new home sales in May, report says
• Tales from the frontlines of Toronto's condopocalypse

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Canada’s Defence Industrial Strategy is the most ambitious industrial policy this country has produced in a generation. The numbers are striking: $180 billion in domestic defence procurement, a projected 240 per cent increase in industry revenues, 125,000 new jobs and more than half-a-trillion dollars in total economic activity by 2035. The government has been explicit that this is not simply a defence plan — it is an economic transformation, a deliberate effort to build a sovereign industrial base capable of sustaining Canadian security without chronic dependence on foreign suppliers. The strategic logic is sound. The sequencing, however, contains a risk that deserves more attention than it has received.

Canada will spend the money. That much is not seriously in question. Defence budgets have been committed, NATO obligations are being met and the procurement pipeline is beginning to move. The real question — the one the DIS has not yet answered — is whether that spending builds the sovereign industrial capacity the strategy promises, or whether it quietly reverts to the path of least resistance: buying capability from allies, primarily the United States, with Canadian industrial participation as an afterthought.

That reversion is entirely possible. And the mechanism by which it happens is not procurement failure or political will. It is a workforce gap that the strategy has acknowledged but not yet solved.

The 125,000 jobs figure is the DIS’s most visible economic promise. It appears in budget documents, ministerial speeches and industry communications as a settled outcome. It is, in fact, a projection — and one that lacks the analytical scaffolding needed to make it credible.

The government’s own State of Canada’s Defence Industry report for 2026 puts the total defence sector economic impact at 81,800 jobs, blending direct employment of roughly 36,000 with indirect and induced effects.

It is not publicly clear whether the 125,000 represents net new positions above that blended baseline, direct jobs only, or a further aggregate. No public document breaks the target down by occupation, skill level, timeline, or region. There is no published gap analysis comparing today’s workforce to what the DIS’s ten sovereign capability areas will actually require.

This matters for a simple reason: Without a defined workforce requirement, the Canada Defence Skills Agenda — the $383 million program meant to build that workforce — is investing without a plan. Good intentions and real dollars are not a substitute for a rigorous labour market needs assessment that tells industry, provinces and training institutions what to build toward and when. That assessment should exist, should be independent and should be updated annually.

Ottawa’s Spring Economic Update 2026 acknowledges a structural shortage of more than 20,000 skilled trades workers annually. The government’s response, Team Canada Strong targeting 80,000 to 100,000 new Red Seal tradespeople by 2030-31, lists defence as one of four priorities alongside housing, infrastructure and resource development.

That is a crowded queue. All four sectors will compete for the same apprentices, the same instructors and the same provincial training capacity. And on current terms, defence is not well-positioned to win that competition. Housing and infrastructure offer simpler entry, faster clearances and more familiar career pathways. The apprenticeship system is already losing ground: fewer than 34,000 of 100,000 new registrants completed in 2024. Adding more entrants to a pipeline with a two-thirds attrition rate does not solve the problem.

If the defence industrial base cannot secure its share of the trades workforce, the most capital-intensive programs in the DIS — shipbuilding, ammunition production, armoured vehicle manufacturing — will face the same execution risk that has plagued Canadian defence programs for decades: not a lack of money or political commitment, but a shortage of people qualified and available to do the work. The result is schedule slippage, cost escalation and ultimately a return to foreign procurement to fill the gap.

A dedicated defence-sector stream within the trades pipeline — with ring-fenced capacity, curriculum aligned to sovereign capability requirements and structured employer commitments — is not a luxury. It is the mechanism by which the DIS’s industrial ambition becomes executable.

The DIS leans heavily on small and medium-sized businesses as the engine of industrial growth — and rightly so. SMBs represent more than 90 per cent of firms in the Canadian defence sector. They are also the most exposed to workforce gaps and the least equipped to absorb them.

A prime contractor can carry cleared staff between contracts, offer competitive salaries and maintain HR infrastructure capable of navigating complex training systems. An SMB typically cannot. When skilled workers are scarce, they flow toward larger, more stable employers — which means the supply chain depth the DIS requires may never fully develop, regardless of how much capital is directed at it. Workforce scarcity at the SMB level doesn’t show up as a single visible failure; it shows up as chronic underperformance against industrial targets, program delays and a slow drift back toward foreign subcontracting. It is the quiet risk inside the quiet risk.

The most promising structural response lies in dual and multi-use technology firms — companies operating simultaneously in commercial and defence markets. This is where Canada has genuine and underexploited competitive advantage. Dual-use firms in areas like AI, quantum, autonomous systems, advanced sensors and cybersecurity are growing organically, attract engineering and technology talent without requiring workers to self-identify as defence industry and produce capabilities with applications across both civilian and military domains. Critically, their commercial revenue base provides the financial stability that pure-play defence SMBs rarely achieve.

A workforce incentive framework that explicitly prioritizes dual-use firms — through targeted R&D tax credits, preferential access to Skills Agenda funding, apprenticeship wage subsidies calibrated to technology roles, and streamlined access to defence procurement — would do two things at once: grow the industrial capacity the DIS needs and build it on a foundation commercially sustainable enough to survive the inevitable gaps between defence contracts. It would also accelerate the development of exactly the sovereign capability areas — digital systems, AI , quantum, space — that the strategy identifies as priorities but has done the least to staff. Security clearance timelines, administrative portability between contractors, and pre-clearance pathways for students in designated programs are also part of the solution — but they are implementation details within a larger structural problem that starts with how the government defines and incentivizes the industrial base it is trying to build.

Canada has a long and expensive history of defence procurement that generated less domestic industrial benefit than promised. The NSS has made genuine progress; other programs less so. The DIS is a sincere attempt to break that pattern — to use the defence budget as a deliberate instrument of industrial development rather than simply a means of equipping the military.

But industrial development requires workers. Sovereign capability requires people with the right skills, the right clearances, and a reason to build their careers in this sector rather than another. Without the workforce foundation in place, the money will still get spent. The equipment will still get procured. The question is simply whether it gets built here, by Canadians, in facilities that will still be operating in 2045 — or whether the path of least resistance quietly wins again.

That is the risk. And it is one the government still has time to address, but the clock is ticking.

Mark Norman is a retired vice-admiral who commanded Canada’s Navy and was vice-chief of defence. He advises several Canadian defence companies.

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Inflation in May accelerated past the top end of the Bank of Canada ‘s target range, but economists say it has likely peaked and the 33 per cent jump in gas prices masks an economy still struggling for footing.

The consumer price index (CPI) rose to 3.2 per cent in May year over year from 2.8 per cent in April and is above the central bank’s target range of one per cent to three per cent, Statistics Canada said on Monday.

Here’s what economists think the latest inflation numbers mean for the economy and interest rates .

‘Old news’: CIBC

“With oil and gasoline prices now well off their previous highs, this should prove to be the peak and, as such, viewed as old news,” Andrew Grantham, an economist at CIBC Capital Markets, said in a note.

Excluding gasoline, inflation would have come in at 2.2 per cent, though that’s still higher than the two per cent recorded in April and is partly due to a jump in vacation tour prices and airfares on higher fuel charges.

Grantham said he expects the CPI to slow to a three per cent increase year over year when the June numbers are released since gasoline prices have already come down as the United States and Iran negotiate a way out of the current conflict.

The Bank of Canada prefers to focus on core inflation, but he said that measure could rise higher over the next few months due to summer travel and the World Cup.

CIBC expects policymakers will hold rates for the rest of the year.

‘Stretched’ consumer: KPMG

“Inflation moved higher again primarily on energy and energy-related items and rising food prices,” Ali Jaffery, chief economist at KPMG Economics, said in a note.

He said the increase in food prices was in line with that category’s trend and can be mostly attributed to bananas and tomatoes.

Statistics Canada said prices for tomatoes rose 45.2 per cent in May as supply from Mexico was hit by a drought and higher transport costs.

Otherwise, inflation continues to prove Canada’s economy is weak and suffering from excessive slack, meaning it has the capacity to produce more than it currently is.

Jaffery said the pass-through from higher energy prices isn’t as broad as it could or ought to be, as evidenced by weaker rental inflation, falling home prices and weaker price growth on items such as clothing and appliances.

“Businesses just aren’t in a position to quickly pass on higher costs to a stretched Canadian consumer, particularly when there are also fewer of them, with the population declining this year,” he said.

Businesses outside the energy sector will likely be disappointed by the report, he said, predicting “margin compression” will continue forcing companies to pause any expansion plans they might have had.

“The Bank of Canada can live with headline inflation elevated in a range of 2.5 per cent to three per cent, so long as core inflation remains around where it is, the economy looks soft and businesses’ expectations about future price increases aren’t excessive,” he said.

KPMG expects the Bank of Canada to hold rates for the rest of the year.

‘Patient approach’ needed: National Bank of Canada

“There is reason to believe that rising energy prices and persistently high food inflation are forcing households to make difficult spending choices,” Matthieu Arseneau and Alexandra Ducharme, economists at National Bank of Canada, said in a note.

Minus food and energy, inflation rose 1.6 per cent year over year, they said, but that’s the biggest jump in five months.

However, that measure had come in very weak in the months prior to May, hitting one per cent annualized over the past three months.

They said there are some signs of a nascent economic recovery after two quarters of negative gross domestic product, adding that the labour market appears a little stronger and so does the housing market, which in May recorded its first “meaningful” national gain in sales for 2026.

But Arseneau and Ducharme said there is still slack in the economy, so workers are not in a position to negotiate wage increases on higher energy prices, something that could boost demand and inflation.

“In our view, interest rates do not appear accommodative in an environment characterized by geopolitical uncertainty and ongoing trade tensions with Washington,” they said. “Overall, current conditions continue to support a patient approach from the Bank of Canada.”

• Email: gmvsuhanic@postmedia.com

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Canadian inflation accelerated to its highest level in more than two years in May, as rising gasoline and food prices helped pushed the rate to 3.2 per cent.

The May reading marked an increase from 2.8 per cent in April, which was also driven by higher gasoline prices.

The last time headline inflation was this high was December 2023, when the consumer price index increased by 3.4 per cent.

According to Statistics Canada data , gasoline prices were up by 33.2 per cent year-over-year in May following a 28.6 per cent rise in April. Those represented the biggest annualized monthly increases since July 2022.

Food inflation also accelerated in May, rising to 4.3 per cent year-over-year compared with 3.8 per cent in April, driven mainly by higher prices for fresh fruits and vegetables.

Airfare and travel tour prices also rose by 7.4 per cent and 0.7 per cent, respectively, as airlines faced higher operational costs, notably jet fuel.

Despite the increase, economists largely believe that headline inflation has reached its peak for this year.

Global oil prices have gone down significantly since the United States and Iran signed a deal with goals to end the war.

“Based on where gasoline prices are in June, relief on energy prices is coming and more relief is on the way. We think May is the peak year-over-year change in headline inflation,” said Andrew Hencic, senior economist for TD Bank Economics.

“Geopolitical risk is still very high.… There is certainly a risk that if energy prices go higher, so will inflation, but that’s not our baseline. The risk is definitely still present, however.”

Food inflation , which has outpaced headline inflation on a year-over-year basis for 16 consecutive months, remained a concern for some economists.

Prices for fresh fruit rose by 5.3 per cent year-over-year — mostly driven by berries and grapes — following a 0.5 per cent decline in April.

Prices for fresh vegetables increased by nine per cent year-over-year in May after a 4.1 per cent rise in April. Statistics Canada attributed the gains to higher prices of broccoli, cauliflower, tomatoes and lettuce. Tomatoes in particular saw a large spike in prices — around 45.2 per cent — due to “poor weather and a reduction in planted acreage following the implementation of United States tariffs.”

Douglas Porter, chief economist with Bank of Montreal Capital Markets, called food the “most serious, most sustained area of inflation.”

According to Bank of Canada data, grocery prices have risen by 22 per cent since 2022 while other consumer prices have risen by 13 per cent.

“Food prices play a big role in forming people’s estimates or expectations of inflation. They tend to believe that everything’s rising as fast as food prices,” Porter said.

“It’s a problem for central banks when food inflation does persist as it has recently.”

But Porter said there is some good news for Canadian households.

Housing inflation has slowed down slightly. Shelter prices rose by 1.7 per cent in May after increasing by 1.8 per cent in April, while rental prices increased by 3.5 per cent year-over-year in May after a 3.6 per cent increase in April.

“There is some good news from the slowdown in housing. First of all, it makes things more affordable for people trying to get in, and second of all, it actually does help tame the overall inflation rate,” Porter said, adding that he expects recent rent declines to show up in Statistics Canada’s data over the next couple years.

Despite higher headline inflation numbers, both Hencic and Porter said they expect the Bank of Canada to hold its key interest rate for the rest of the year because core inflation has been relatively stable.

Porter said geopolitical uncertainty and uncertainty surrounding the Canada-U.S.-Mexico Agreement, along with a sluggish economy, means the Bank of Canada will likely stay on the sidelines for the foreseeable future.

“There’s certainly not enough here to get the Bank of Canada thinking that they have to raise interest rates, but at the same time, there’s nothing here to give them comfort that they should be cutting interest rates, either,” he said.

“I think this report ends up being a bit neutral for the Bank of Canada, and it probably doesn’t really change the dial much in terms of the overlook for interest rates.”
Hencic said, however, he expects core inflation to rise a bit because there will be a lag before any pass throughs from the energy price shock show up in the data.

“It usually takes anywhere from three to six months to really start to see any kind of pass through to other goods and services categories, and so there could be another couple months where you see a little bit more acceleration in core prices,” he noted.

“On the whole, given the relatively soft starting point and where they are right now in May, it’s not bad.”

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• Email: ptran@postmedia.com

Many Canadian businesses say they’re in limbo while waiting to see what happens with the Canada-United States-Mexico Agreement (CUSMA).

The trade pact is up for review as of July 1 and U.S. President Donald Trump has signalled it may be a tough negotiation, even teasing that he may terminate the agreement altogether.

“I’m thinking about maybe we won’t be able to make a deal,” he said at the G7 summit last week. “I would rather not have the CUSMA. The primary reason I wanted it was because there was no way out of NAFTA, which was the worst trade agreement ever made.”

Canada and Mexico, however, are pushing for a six-year extension of the agreement to 2042 from 2036, though Prime Minister Mark Carney has said it’s “no secret” Trump doesn’t like the deal.

With so much trade uncertainty in the air, many businesses are taking a “wait-and-see” approach before making any structural changes to their operations.

Nearly 40 per cent of businesses believe they are ready to implement changes quickly if CUSMA deteriorates, while 30 per cent of businesses believe they only need minimal planning, according to a recent survey by Purolator Inc.

“The companies best-positioned for what comes next share a common trait: They didn’t wait for certainty before acting,” the report said. “They diversified suppliers, built secondary manufacturing relationships, invested in CUSMA compliance infrastructure and established contingency plans before they needed them. The opportunity to join that group is still open, but it’s narrowing.”

Of course, Canadian businesses are no stranger to dealing with tariffs, as they have been a signature policy of Trump’s second term, but tariffs have cut their revenues by about 23 per cent, or an average of $661,000.

More than 90 per cent of businesses have already made at least one operational change over the past 18 months due to the tariffs, most commonly reducing exposure to the U.S. and building some flexibility into the supply chain.

Still, the uncertainty of what may come next is leaving many businesses in limbo. Businesses consistently said the uncertainty surrounding international trade is worse than the tariffs themselves, the Purolator survey said.

“A tariff is a cost. It can be modelled, absorbed, passed through or built into a contract. Uncertainty is different,” the report said. “It paralyzes planning, delays investment and forces businesses into reactivity. Rather than preparing for what comes next, they must focus on responding to what just happened.”

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High gas prices helped Canada’s retail sector report a 0.5 per cent increase in activity in April, though economists warn the increase does not mean strong consumption.

Sales at gas stations rose 5.1 per cent in the month, while sales at motor vehicle and parts dealers climbed 1.7 per cent.

Overall, April marked the fourth consecutive monthly increase in retail sales.

Despite the positivity, Randall Bartlett, deputy chief economist with Desjardins, warned that the numbers are misleading, as retail sales were weak overall.

Read more here.

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When it comes to consolidating accounts, there are usually associated fees, but there’s no need to worry. Some fees are absorbed the benefitting financial institution, while combining accounts may cross a threshold for lower rates. Read more here.

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Financial Post on YouTube

Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Ben Cousins with additional reporting from Financial Post staff and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com .

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This week FP Video looks at the state of the Canadian retail sector, the many proposed data centre plans in Alberta (and which ones you can expect to break ground first), and Daniel Trainer discusses the potential impact reopening the Strait of Hormuz could have on soaring oil prices.

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Bruce Winder, retail analyst, talks with Financial Post’s Larysa Harapyn about retail trends in Canada, including Lululemon Athletica Inc., Canadian Tire Corp. and the return of Zellers.

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The Canadian dollar is at risk of dropping below 70 cents U.S. amid surging demand for the greenback as markets reprice the expectation that the United States Federal Reserve will hike rates instead of cutting them.

The loonie on Friday fell to 70.56 cents U.S. in mid-morning trading, well off its year-to-date high of 74.1 cents U.S. in late January and now sits at its lowest point in about a year.

“The Canadian dollar selloff this week has been particularly brutal,” Shaun Osborne, Bank of Nova Scotia’s chief currency strategist, said in a note, citing a 1.2 per cent gain for the greenback, the “sharpest” since the loonie slumped badly in the spring.

In the short term, he said the U.S. dollar rally could mean the Canadian dollar falls as low as 68.9 cents U.S.

“The U.S. dollar is strengthening into the end of the second quarter and its gains are being driven by fundamentals as markets have moved to re-price a considerable amount of Fed tightening in the aftermath of the June (Federal Open Market Committee) meeting,” he said.

The U.S. dollar index — which measures the greenback against a basket of other major currencies including the Canadian dollar — rose 1.3 per cent from Wednesday to Friday on expectations that the Fed will hike interest rates from their current level of 3.5 per cent to 3.75 per cent sooner than had been expected.

Prior to the Fed meeting on Wednesday, markets were fully pricing in a rate hike no sooner than March 2027, but markets are now betting on a rate hike of 25 basis points as soon as the Oct. 28 Fed meeting, with an 88 per cent chance of a hike coming in September.

All that has spelled bad news for the Canadian dollar as the interest rate differential between the loonie and the greenback appears set to widen. The Bank of Canada on June 10 held interest rates at their current level of 2.25 per cent for the fifth straight time and most economists expect policymakers to continue holding rates for the remainder of the year.

As a result, the higher rates on offer in the U.S. are more attractive to investors, pulling them away from the loonie. The U.S. dollar has also benefited from its haven status.

“The Canadian dollar has suffered through the latter half of the second quarter, weakening to fresh 2026 lows on the back of a material widening in U.S.-Canada yield spreads,” Osborne said. “The Bank of Canada’s cautious hawkishness has offered a minor headwind, especially when contrasted with the material shift in the Fed’s outlook.”

But interest rates aren’t all that is hitting the loonie, Sarah Ying, head of currency strategy at CIBC Capital Markets fixed income, commodity and currency unit, said in a note on June 19, since current risks favour the U.S. dollar.

“If the geopolitical risk premia comes back, this would benefit the U.S. dollar leg (of the currency pair),” she said.

The de-escalation in the Middle East and subsequent oil sell-off could also “weaken” the Canadian dollar, Ying said, adding that West Texas Intermediate — the North American crude benchmark — has dropped 30 per cent since mid-May, taking the loonie down with it.

She said strong U.S. fundamentals and a “hawkish Fed” could keep the Canadian dollar down.

Osborne’s long-term outlook is for the Canadian dollar to rise to 75.2 cents U.S. by year-end, with Scotiabank sticking with its expectation for Fed cuts at the end of the year and for markets to reprice the U.S. dollar as the risks around the U.S.-Iran conflict fade.

• Email: gmvsuhanic@postmedia.com

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Increased spending on gasoline and fuel pushed Canadian retail trade activity up by 0.5 per cent in April, but economists are warning the gains may have more to do with higher prices than a strong consumer.

Sales at gasoline stations and fuel vendors rose by 5.1 per cent for the month, according to data released by Statistics Canada on Friday morning.

Sales at motor vehicle and parts dealers also posted gains, increasing 1.7 per cent in April following a 0.1 per cent decline in March, led by higher sales at new car dealers.

Overall, April marked the fourth consecutive monthly increase in retail sales and flash estimates suggest the trend continued into May, with a gain of one per cent.

However, core retail sales — which exclude gasoline stations and fuel vendors as well as motor vehicle and parts dealers — fell by 0.7 per cent, their second consecutive monthly decline, led by lower sales at food and beverage retailers and general merchandise retailers.

Randall Bartlett, deputy chief economist with Desjardins, said the headline numbers were misleading because retail sales were weak overall.

The sharp increase in gasoline and fuel sales were attributed to higher gasoline prices that month, which led households to reallocate money away from other items, he said.

“We’re potentially seeing a shift in consumer behavior because of the higher cost of gasoline. This may have some persistence as we go into May, as we saw in the advanced indicator. Some of that is going to be coloured by the rising cost of gasoline as well,” Bartlett said.

He also said the decline in core retail sales may persist into May due to this potential shift in consumer spending, but noted that more data is needed to confirm this trend.

“There’s a good chance that we’ll see ongoing weakness in things like core retail sales, potentially motor vehicle sales and almost everything outside gasoline sales, because of higher cost of fuel eroding household budgets,” Bartlett said.

“One month certainly isn’t a trend, but two months start to give a bit of an indication, so we’ll be watching to see if we get another month of weak core retail sales data. Then we can see if it’s households reallocating dollars towards higher costs of fuel, or if it’s a reflection of deep stagnation in the Canadian economy.”

Andrew Grantham, executive director and senior economist at CIBC Capital Markets, said Friday’s numbers further highlight that higher gasoline prices are cutting into the ability for households to spend money on other areas.

“Softness in household spending makes it harder for companies to pass through cost increases to consumers, and therefore less likely that the prior spike in oil prices will translate into more broad-based inflationary pressures. This is one of the reasons why we continue to expect that the Bank of Canada will keep interest rates on hold throughout 2026,” he wrote in an emailed note on Friday.

“Overall, the volume of consumer goods spending appears to be stalling in the second quarter following a strong start to the year, with high pump prices cutting into household spending on more discretionary items.”

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Bartlett said, however, that the data may look a little different for June. For one, low- and middle-income households started receiving the Canada Groceries and Essentials Benefit on June 5, which could mean a bump in retail sales for that month.

Gasoline prices have also started to come down after the United States and Iran reached a deal to reopen the Strait of Hormuz, which will help household budgets.

“There’s a real possibility that we could see better activity at the end of the quarter and leading into the summer.… We saw that real consumption growth was quite strong in the fourth quarter of last year and in the first quarter of this year, which sort of goes against the technical recession narrative that we’ve heard,” Bartlett said.

“This is where we can see core retail sales pick up again as fuel prices come down.”

Grantham made a similar observation.

“The recent decline in gasoline prices, combined with expanded household benefits paid by the Federal government, should support a pick-up in spending again during the second half of the year,” he wrote.

• Email: ptran@postmedia.com