Hot Australian inflation that keeps a September RBA hike live, combined with Canada's tariff retaliation against the US, is pushing AUD/CAD toward parity.
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AUD/CAD Nears Parity as RBA Hike Odds Jump to 36%
A hotter-than-expected Australian CPI print that keeps a September RBA rate hike on the table, layered on Canada's newly specified tariff retaliation against the US, is driving AUD/CAD toward parity — a cross that expresses both stories more cleanly than either currency does against the dollar.
The Reserve Bank of Australia's August minutes, published 25 August, show the Board explicitly weighed a pre-emptive 25 basis point increase before holding the cash rate at 4.35%, with several members judging it quite possible that upside inflation risks would materialise and require further tightening.
Australia's annual CPI cooled to 3.5% in July from 3.8% in June, but the Reuters consensus was 3.3%, and the trimmed mean held at 3.6% for a third straight month while monthly prices rose 1.0%. Cash rate futures lifted the probability of a September hike to 36% from 17% within hours of the release, and a move by February moved to about 94%. The Australian dollar rose 0.2% to 0.7176 against the US dollar. On the other side, Canada announced C$27.6bn in retaliatory tariffs on more than 700 US products, effective 8 September, after Washington imposed 50% levies on Canadian steel, dairy, appliances and agricultural equipment.
The two forces pull AUD/CAD in the same direction: a hawkish RBA supports the Australian dollar, while trade uncertainty weighs on the Canadian dollar. The cross trades near parity, and momentum could continue if the RBA delivers a hike at its 28-29 September meeting while US-Canada tensions escalate. If the Board holds and the dispute de-escalates, the pair could stall.
Why the July CPI Keeps the RBA Hawkish
The move in the annual rate from 3.8% to 3.5% is largely arithmetic. In July 2025, monthly CPI jumped 1.3%, one of the sharpest single-month increases of the cycle; that reading dropped out of the 12-month window and was replaced by July 2026's 1.0%. Prices did not go backwards — only the rate of change did.
The trimmed mean, the RBA's preferred underlying gauge, sat at 3.6% over the year to July, unchanged from May and June, and climbed 0.5% on the month, its largest monthly gain in a year and well clear of the 0.3% pace markets had pencilled in. Non-tradables inflation ran at 4.4% against 1.7% for tradables, and services inflation was 3.7%. Housing remains the largest contributor at 5.0%, with new dwelling prices up 5.7% annually as builders pass on higher materials and labour costs.
The counterweight is the labour market. Unemployment climbed to 4.5% in July, the highest since late 2021 and above the 4.4% expected, while employment fell by 15,800 after a revised 80,200 gain in June. The Wage Price Index rose 0.8% in the June quarter and 3.2% over the year, down from 3.4% a year earlier, taking some heat out of the second-round pressure the Board has been watching for.
Canada's Retaliation Adds to the CAD Drag
Canada's finance and industry ministers announced a "focused response" covering C$27.6bn in US imports, with most of the more than 700 items facing tariffs of 25% or 50% effective 8 September. The measures target steel, dairy, appliances, agricultural equipment, pulp and paper — mirroring the sectors Washington hit with 50% levies after trade talks collapsed in mid-August. The White House said further escalation remains on the table.
The last time the US and Canada traded tariff blows at this scale, cross-border supply chains in autos and agriculture absorbed the cost within weeks, but a prolonged standoff would pressure the Canadian dollar through both trade and growth channels. For AUD/CAD, the cross expresses the divergence more cleanly than either currency against the dollar: Australian rate expectations are the dominant domestic driver, while the loonie carries the trade-war discount.
What Decides the September Meeting
The Board meets 28-29 September with the June-quarter national accounts due 2 September and the August labour force survey in mid-September. The August CPI lands 30 September, the day after the decision, so July is the last inflation reading the Board will see. A trimmed mean stuck at 3.6% with non-tradables above 4% is a poor argument for waiting; a weak GDP print and a second straight fall in employment would be a good one. The Board is left choosing between tightening into a slowdown already under way and letting above-target inflation harden into expectations.
This article is for informational purposes only and does not constitute investment advice.
[1] Hot Australian CPI, Canada Tariff Retaliation — Is AUD/CAD Ready to Break Parity?[2] Australia Inflation Eased to 3.5%. Why an RBA Rate Hike Is Still on the Table | EBC Financial Group[3] US weighs further trade escalation after Canada sets retaliatory tariffs[4] Canada announces retaliatory tariffs on wide range of US goods[5] U.S.-Canada Tariffs: Will Farmers Pay the Price?
