Despite a 35% tariff increase, the Canadian dollar stays largely unaffected by developments.
by VT Markets
/
Aug 1, 2025
The Canadian dollar has remained steady, even with a recent rise in tariffs from the US. The exchange rate between USD and CAD has hit a 10-week high, showing that the Canadian dollar is at a 10-week low.
The US has increased tariffs on Canadian goods from 25% to 35%. This new rate will take effect shortly as US Eastern time shifts to August 1.
Impact on the Canadian Economy
With the 35% tariff going live, the Canadian dollar faces continued downward pressure. This drop to a 10-week low for the CAD may just be the start of a longer trend. We expect further weakness against the U.S. dollar in the upcoming weeks.
This tariff hike affects an already weak Canadian economy, where Q2 GDP growth slowed to only 0.8% annualized. In comparison, the latest U.S. non-farm payrolls reported a strong gain of 215,000 jobs, keeping the Federal Reserve on track. This widening economic gap makes holding U.S. dollars more attractive than Canadian dollars.
For derivative traders, this spike in uncertainty presents a big opportunity. Implied volatility on USD/CAD one-month options has surged over 10%, a level not seen since bank troubles in spring 2024. Strategies like long straddles, which benefit from increased price movement, should be on the table.
Potential Monetary Policy Response
We anticipate that USD/CAD will aim for higher levels, possibly reaching the psychological 1.4000 mark. A similar situation occurred during the trade disputes of 2018 when escalating tariffs led to an 8% rise in just a few months. History indicates that this trend might continue.
The market is now expecting a response from the Bank of Canada. Overnight index swaps show more than a 70% chance of a 25-basis-point interest rate cut by the October meeting. This expectation of easing monetary policy may limit any potential rallies in the Canadian dollar.
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by VT Markets
Aug 1, 2025
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