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A few weeks ago, it looked like a July interest-rate hike from the Bank of Canada was a lock. But with every trade threat emanating from Donald Trump’s pursed lips, the financial markets have grown less sure.

As the U.S. President’s topsy-turvy trade agenda tightens its grip on the markets’ attention, traders have grown increasingly nervous about the implications for the Canadian economy, and they had already taken a couple of conspicuous steps back from their bet that the central bank will raise interest rates again in its next rate decision, on July 11.

Add to the mix weak results from two key economic indicators on Friday – reports from Statistics Canada showed unexpectedly sluggish readings for both inflation and retail sales – and the Bank of Canada’s path looks even less certain.

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Pricing of overnight index swaps (OIS) – the market’s proxy for central bank rate expectations – indicates that traders have retreated from a solid 80 per cent confidence in a rate hike two weeks ago to just above 50 per cent today.

At the same time, traders have been fleeing the dollar – reflecting both their concern about the threats to Canadian exports from the country’s biggest customer and the growing belief that the deepening trade worries might give the Bank of Canada good reason to at least delay further rate increases. After trading at nearly 80 U.S. cents a month ago, the currency was barely keeping its head above 75 U.S. cents Friday.

All of this will be food for thought as central bank Governor Stephen Poloz and his governing council gear up for their July decision – one that, based on the bank’s own recent signals, had looked like a foregone conclusion until these Trump-fuelled market gyrations came along. The doubts in the financial markets will send a strong message to the bank that a serious re-evaluation of risks is afoot. The worry train is pulling out of the station; Mr. Poloz will have to decide whether to climb on board.

When the Bank of Canada issued its most recent rate decision in late May – holding its key rate steady at the time but hinting strongly that the next rate increase was imminent – it looked like only two things could divert the path to a July hike. One would be evidence of a meaningful setback in Canada’s economic performance. The other would be a meaningful escalation in uncertainties surrounding the Canada-U.S. trade relationship.

Since then, the economic data have been a mixed bag. Canada’s first-quarter gross domestic product figures, released the day after the rate decision, were a bit disappointing, but they showed that the economy was gaining momentum entering the second quarter. The job market was essentially flat in May and looks to be in something of a pause after a strong run of growth. Merchandise trade numbers showed solid export gains and a sharp reduction in the trade deficit, but manufacturing sales were unexpectedly weak.

On Friday, Statscan said the consumer price index increased at an annualized pace of 2.2 per cent in May, below economist projections of 2.6 per cent. Retailers, meanwhile, saw an unexpected 1.2-per-cent drop in sales in April.

While the data haven’t done much to bolster the economic outlook, they likely don’t add up to nearly enough to alter the central bank’s view – which is, essentially, that the economy is near full capacity and is still growing at a solid clip.

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The noise around trade, on the other hand, has grown very loud indeed since the central bank’s May rate announcement. The Bank of Canada would certainly be justified in taking this escalation in trade-related uncertainty to heart and pushing back its rate increase until September – especially given that the recent economic data haven’t added to the urgency.

At the same time, the falling Canadian dollar adds another wrinkle to the rate decision. The weaker currency lends support to exports and adds upward pressure to inflation – a critical focus for Bank of Canada rate policy. While the central bank often stresses that it looks through currency gyrations when gauging the economy’s underlying inflation, it will need to navigate this carefully, given that the country’s inflation rate is already running above the bank’s official 2-per-cent target.

If the trade mess has, indeed, taken a bite out of the central bank’s appetite for an immediate hike, there’s no reason to keep anxious markets hanging until the July rate announcement. Mr. Poloz will give a speech and press conference in Victoria on Wednesday – the last public words from the Bank of Canada’s brass prior to the July rate decision.

The title of the speech, fittingly, is “Let Me Be Clear: From Transparency to Trust and Understanding.” There could be no better time for Mr. Poloz to provide the markets with some transparency and understanding about how the increasingly messy trade file is altering his thinking.

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