Canadian Dollar: Tariff risks cloud outlook – Commerzbank

Michael Pfister at Commerzbank assesses the potential impact of higher US auto tariffs on Canada and the Canadian Dollar. The severity of the shock will depend heavily on whether USMCA protection applies, but Pfister argues that deteriorating sentiment could weigh on Canada’s real economy even if the effective tariff increase remains limited. With the measures announced well ahead of 2027, however, there may still be room for negotiations and an agreement before year-end.

US auto tariffs and CAD scenarios

"Yesterday, the US President announced a fairly moderate response by his standards: from 1 January 2027, tariffs on cars are to be doubled from 25% to 50%. This will affect a far greater proportion of Canadian exports to the US than the tariffs that came into force on Saturday, which are thought to have covered around USD 20 billion worth of goods."

"Depending on the scenario, the impact would either be greater (without USMCA protection, in which case the tariff increase would likely exceed last year's total rise) or still manageable (with USMCA protection). The latter scenario would also entail difficulties, however."

"In April, we demonstrated that the prevailing sentiment is more important than the tariff increase itself. This means that the Canadian real economy could still be significantly impacted even if the effective tariff rate rises only slightly."

"But there is a glimmer of hope: the new US tariffs were announced well in advance, possibly to allow time for negotiations. Furthermore, yesterday the US President discussed at length the fact that the country depends on aluminium imports from Canada."

"So perhaps an agreement can still be reached by the end of the year."

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