US Decides Not to Extend CUSMA
July 6, 2026
When the Bank of Canada (BoC) meets this Wednesday, I expect it to focus on two competing risks which have continued to roughly offset each other.
First, there is the threat that spiking energy prices will engender what BoC Governor Macklem refers to as more “generalized inflation”.
Fortunately, there has been little evidence of that thus far. Our core inflation data, which strips out energy and food prices, are still hovering at the Bank’s 2% target. In addition, our latest inflation data confirmed that about one-third of the prices that comprise our Consumer Price Index are rising by more than 3%, which is a little below the long-term average.
When the US/Iran cease-fire was announced, oil prices quickly retraced 95% of their previous war-related run-up, to a degree that surprised many market watchers. They subsequently rebounded off those recent lows when hostilities resumed, but we are still nowhere near the previous peak.
The second key risk to the Canadian economy, and the one the Bank expects to be longer-lasting, is US trade uncertainty.
The Trump administration’s decision not to renew the CUSMA was not unexpected, but it further entrenches trade uncertainty as a long-term headwind for our economy.
The US decision will also mean that CUSMA will now be subject to annual reviews. That will make Canadian and foreign businesses less likely to invest in capacity enhancement and expansion in Canada, and as a by-product, will likely further weaken our productivity. Over the longer term, it will increase both trade friction and costs, and it will also likely weaken the Canadian dollar.
At its last policy-rate meeting, the BoC signaled its willingness to cut its policy rate “if the United States imposes significant new trade restrictions on Canada”. I think the imposition of annual reviews meets that standard.
If the US/Iran hostilities had not resumed, I think the BoC might have cut this week. Instead, put me down for a more dovish-than-expected hold.
The Latest on Mortgage Rates
Government of Canada (GoC) bond yields surged higher alongside their global counterparts early last week as hostilities between the US and Iran resumed. But, as has so often been the case of late, the surge quickly fizzled out, and our bond yields finished the week only marginally higher.
Most lenders held their fixed mortgage rates steady, and variable-rate discounts off prime were unchanged.
The bond-market doesn’t expect the BoC to move its policy rate when it meets this Wednesday, and that means variable mortgage rates aren’t likely to change. But if the Bank sounds more dovish-than-expected, which is my prediction, that could cause GoC bond yields to fall and put downward pressure on our fixed mortgage rates.
My Take on Today’s Mortgage Options
Fixed rates are likely to remain volatile. Three- and five-year terms are the most popular choices. If the spread between those two options is minimal, I still think five-year terms offer better value.
While I appreciate the appeal of fixed-rate stability in our current volatile environment, I continue to believe that variable rates will likely prove cheaper over their full terms.
(Important note: Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs and, in some cases, higher payments.)
The BoC continues to look through our recent inflation spike because it has thus far been limited to surging energy prices. If the US/Iran war drags on and its associated inflationary impacts become broader and more entrenched, there may come a time when the Bank will be compelled to tighten. For now, my assessment is that we won’t get to that point, and I am encouraged by the rapid drop in energy prices after the US/Iran sixty-day cease-fire was announced (and despite some retracement since).
Simply put, trade uncertainty remains the greater long-term threat to our economy. The US decision not to extend CUSMA ensures that uncertainty will remain a headwind for our economy for the foreseeable future. At some point I think the BoC will be compelled to lower its policy rate to a stimulative level (of 2% or less) in response.
Insider’s Tip for Borrowers
Your income is the single most important factor on your mortgage application because it confirms your capacity to pay, which is the most reliable indicator of a loan’s overall risk.
This post details the two key income tests that are used by lenders, outlines the basic income documentation that will typically be required, and offers advice on how to put your best foot forward.
Three Posts Every New Visitor to My Blog Should Read
This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty.
For myriad reasons, some of them unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender.
This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (They are not standard and can vary in important ways.)
