The Canadian Dollar is currently at its lowest value since May, trading at 1.3834 USD/CAD. This drop coincides with a strong US Dollar and cautious investor sentiment as we approach the tariff deadline. US President Trump has warned that Canada could face tariffs on its goods if a trade deal isn’t finalized by August 1. The proposed tariffs are as high as 35% on certain exports not covered under USMCA, particularly affecting industries like copper and pharmaceuticals.

Economic Indicators

According to Statistics Canada, the GDP fell by -0.1% in May, marking two consecutive monthly declines. The Bank of Canada has kept interest rates steady at 2.75%, noting that inflation is near 2% but acknowledging ongoing trade uncertainties. In the US, the Bureau of Economic Analysis reported a 0.3% increase in the core PCE Price Index for June. Personal spending and income also rose by 0.3%. Initial Jobless Claims were at 218K, reflecting a strong job market. The Bank of Canada uses interest rates to maintain price stability. While quantitative easing can weaken the Canadian Dollar during crises, tightening measures typically strengthen it. Therefore, quantitative tightening tends to be favorable for the Canadian Dollar. Given the current weakness of the Canadian Dollar, we are closely monitoring the tariff deadline on August 1. The USD/CAD rate has already reached 1.3834, the highest it has been in months, indicating that traders are preparing for negative outcomes in the ongoing trade talks.

Trade Strategies and Market Reactions

Economic data from both the US and Canada suggests a stronger US Dollar compared to the Canadian Dollar. Statistics Canada reports that Canada’s GDP fell by -0.1% in May 2025, following a weak first quarter. On the other hand, the US economy appears strong, with personal spending and income on the rise. For derivative traders, this trend points to strategies that benefit from a rising USD/CAD or at least protect against further declines in the Canadian Dollar. There has been a notable increase in one-month implied volatility for USD/CAD options, jumping from 6% to over 10% this past month. This spike indicates that the market expects sharp movements, making options an effective tool for managing risk. We can look back to the trade uncertainties during the 2017-2018 NAFTA renegotiations for comparison. At that time, threats to Canadian trade caused the USD/CAD to rise from around 1.25 to over 1.36. History shows that such trade disputes often lead to lasting weakness for the Canadian Dollar. The threatened tariffs are significant, especially the proposed 35% tax on major exports like pharmaceuticals and copper. In 2024, Canada exported over $17 billion in pharmaceuticals to the United States. Such high tariffs would severely impact Canadian export revenues and overall economic growth. This difference in economic health likely means the Bank of Canada will remain cautious, while the US Federal Reserve might feel pressure to maintain tighter policies. With a shrinking economy, the Bank of Canada is unlikely to raise its 2.75% interest rate, creating a clear policy gap with the US. This fundamental difference suggests that the Canadian Dollar may continue to weaken in the coming weeks. Create your live VT Markets account and start trading now.

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