National Bank of Canada (NBC) analysts report that Canada’s overall tariff burden remains relatively low compared with peer countries, but they say this advantage is weakening. They note that the approach to measuring tariffs can hide uneven impacts across parts of the economy as the United States-Mexico-Canada Agreement (USMCA) review nears.
The analysts say customs data show Canada has a favourable tariff rate versus other nations, but the gap has narrowed. They also state that the data may miss trade that has shifted elsewhere or is no longer recorded as effects build.
Tariff Exposure Is Not Even
NBC points to manufacturing as one of the most exposed areas and says it continues to face larger negative impacts than other sectors. They add that national averages can mask sector and provincial risks, and they recommend assessing tariff exposure by province and industry rather than relying on a single headline measure.
With the formal review of the USMCA set for this summer, we see a narrowing tariff advantage for Canada that introduces significant uncertainty. Headline averages are misleading, as the real risks are concentrated in specific sectors and provinces. This environment is ideal for derivative plays that can capitalize on or hedge against potential negative outcomes.
For currency traders, the focus should be on the Canadian dollar’s vulnerability in the coming weeks. As of early May 2026, implied volatility on USD/CAD options has already ticked up by 5% over the last month, showing the market is starting to price in risk. We see value in buying out-of-the-money CAD puts with expirations after the July review period, providing a low-cost way to position for a weaker loonie if negotiations turn sour.
The exposure is most acute in the manufacturing sector, particularly in auto parts and aluminum, which are heavily reliant on cross-border supply chains. We are looking at protective puts on major industrial stocks based in Ontario, such as those in the automotive supply chain, which saw their share prices drop over 15% during the tariff threats back in 2025. These specific equity options allow for a more targeted hedge than a broad index position.
Broad Market Hedges And Long Volatility
Looking back at the volatility during the original agreement’s renegotiation in 2025, we recall sharp swings in the S&P/TSX Composite Index. This suggests that broad market protection is also prudent. Index options, like puts on TSX 60 tracking ETFs, offer a hedge against a systemic shock if the review introduces widespread tariffs that impact investor confidence across the board.
Given the review is still weeks away, current option premiums have not yet fully priced in a worst-case scenario. We believe establishing long volatility positions now, such as straddles on key industrial names, could be advantageous. This strategy profits from a large price move in either direction, which is a distinct possibility as headlines drive sentiment around the negotiations.
