Canada’s Prime Minister Carney believes that US tariffs on international trade might stick around for a while. Right now, no country seems able to avoid these tariffs. Starting August 1, the US will impose tariffs of 35% on Canadian goods. However, these tariffs might settle between 10% and 20%.

Outlook On Tariffs

Donald Trump expects that companies will handle most of the cost increases from these tariffs. He sees tariffs as a tax for doing business in the US and as compensation for unfair trade practices. Trump says tariff cuts will depend on removing tariffs on US exports. Based on Carney’s comments, we think the market is underestimating the risks of a renewed trade conflict. Trump’s perspective is that tariffs are a permanent negotiating tool, marking a significant change in approach. The next few weeks won’t be about guessing the outcome but about preparing for the turbulence the negotiations will create. Volatility is the most noticeable trade. We see a big opportunity in the currency markets right now. The Canadian dollar is very vulnerable. With over $2.5 billion in goods and services crossing the border every day, even a 10% tariff will hurt the Canadian economy. The USD/CAD exchange rate is around 1.37 and doesn’t reflect the panic a 35% tariff would cause. In 2018, during tariffs that were less severe, the Loonie dropped over 8% in just a few months. We should consider buying long-term call options on the USD/CAD, betting it will rise to 1.40 or higher as negotiations heat up.

Investment Strategy

The impact of tariffs won’t be the same across the board, and we can take advantage of this using options on specific sectors. US tariffs will hit Canada’s S&P/TSX Composite Index hard. We should start by buying puts on Canadian index ETFs. According to Statistics Canada, motor vehicles and parts are Canada’s biggest exports to the US, worth over $80 billion a year. This makes Canadian auto parts manufacturers like Magna International and Linamar Corporation very exposed. We can take bearish positions here by buying puts or shorting their stocks. The Canadian lumber and aluminum sectors will also be directly affected. In past trade disputes, we see a clear pattern: the overall market may dip, but targeted sectors take the biggest hits. It’s crucial to take action before the situation escalates. With a U.S. election approaching, volatility driven by headlines is highly likely. Trump’s strategy is well-documented, so we should use past data to inform our trades now, while the costs of protection and speculation are still relatively low. We are buying volatility and anticipating a weaker Loonie. Create your live VT Markets account and start trading now.

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