Canadian Dollar: Binary tariff risks shape near-term path – TD Securities

TD Securities strategists argue that Section 338 tariff negotiations pose a binary risk for the Canadian Dollar (CAD) and USD/CAD. A tentative deal would slightly reduce tariff risk premia and support CAD, but they stress that a breakdown in talks is underpriced and could trigger a sharp USD/CAD move higher as policy uncertainty around United States-Mexico-Canada Agreement (USMCA) persists.

CAD seen vulnerable to tariff shocks

"Trade talks between the US and Canada have intensified ahead of Saturday's deadline to avoid 338 tariffs with both sides close to a deal that is also reported to reduce steel/aluminum tariffs to 25% and auto tariffs to 15%. This would reduce policy-implied tariff rates by 1.5% and lift GDP by 0.1-0.2pp by the end of 2027."

"We look for the Bank of Canada to proceed cautiously even if this deal is finalized by Saturday. The Bank will want to see more data on the impact of lower tariffs, which won't be available until November. We continue to look for the Bank to stay on hold through 2026 before hiking in January."

"Recent moves in USD/CAD have primarily been a function of the broader USD backdrop, with softer US data, reduced expectations of near-term Fed hikes, and concerns around more active Treasury participation in financial markets all weighing on the dollar."

"More resilient Canadian data have provided some marginal support to the CAD, while trade and tariff-related headlines have generated two-way volatility in the cross rather than a sustained directional trend."

"A trade deal would be modestly CAD-positive by reducing some tariff risk premium, but the upside is likely limited. Any agreement is unlikely to fully resolve trade tensions, with tariffs still in place, USMCA uncertainty lingering, and little improvement in Canada's longer-term negotiating position and leverage. The bigger asymmetry lies in a breakdown of talks. Such an outcome appears underpriced and could drive a sharp reversal higher in USD/CAD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)