Last week, the CAD strengthened after the release of Canadian CPI figures, as anticipated in our preview of the data. But last weekend added a political curveball. Talks on ending the tariff war between the US and Canada broke down amid mutual accusations. US President Donald Trump then went ahead with the threatened 50% tariffs on around $20 billion in goods imported from Canada.
The measure affects just under 5% of Canada’s exports to the US. Prime Minister Mark Carney responded with “dollar-for-dollar” reprisal tariffs that would take effect on September 8. The tariffs would affect a similar fraction of US exports to Canada. The media has warned that the measures could affect thousands of jobs. Notably, Canada’s biggest import, crude, was not affected.
Where Now for the Currency Pair
Negotiations between the two sides continue. Although the US tariffs are now in effect, a quick agreement could forestall Canada’s planned reprisal. Media reports suggest that a deal was close. Trump also announced on social media that an agreement had been practically made. It is therefore possible that an announcement in the coming days could reverse some of the CAD weakness.
However, the outcome does not fit the usual Trump “maximum pressure” tactic of making a last-minute demand before a “TACO trade”. Trump threatened 50% tariffs, then held them off for three days during intense negotiations. The move appears to have failed to deliver the desired result.
Why Markets Might Have to Wait
Reportedly, the breakdown resulted from jurisdictional disagreements on the American side, which led Canada to withdraw from the talks. This suggests a genuine disagreement between the two sides. The TACO trade did not materialize.
The implication for currency markets is that a political resolution might not arrive quickly. The US-Canadian trade negotiation has become particularly difficult for both sides.
Until the trade situation improves, traders can focus on upcoming economic data. From the Canadian side, Friday’s GDP figure is the highlight of the week.
The loonie has faced a tug-of-war between positive domestic data and trade tensions. The recent CAD rally, which pushed USDCAD lower, gained support from the view that both sides were making progress towards resolving the trade dispute.
What the Market Is Looking For
The question now is whether Canada’s positive economic situation can overcome the impact of the trade dispute. The Canadian economy is expected to rebound in the second quarter, supported by higher crude prices.
Consensus forecasts point to Canadian Q2 GDP jumping to 0.8% from 0.0% in Q1. That would put annualized growth at 3.4%, well above the US growth rate of 1.5% over the same period.
A substantial beat could support the loonie and push USDCAD lower, particularly if upcoming US data comes in weak. On the other hand, a miss could leave the CAD under pressure. Combined with the trade dispute, that could prompt USDCAD to retrace a large portion of its summer gains.
