US President Donald Trump has proposed a possible 100% tariff on Canadian goods if Canada seeks a trade deal with China. Canada’s Prime Minister, Mark Carney, responded by stating that Canada has no intentions of signing a free trade agreement with China, despite having recently reduced tariffs in some areas. Currently, the USD/JPY pair has risen by 0.03%, reaching 1.3701.

Factors Influencing The Canadian Dollar

The value of the Canadian Dollar (CAD) depends on several factors, including the Bank of Canada’s interest rates, oil prices, the overall health of the economy, and trade balance. Since oil is Canada’s biggest export, its price has a direct impact on CAD. Generally, when oil prices go up, CAD also rises. The Bank of Canada’s interest rate decisions influence CAD as well. Higher rates usually strengthen the currency. Economic indicators like GDP, employment, and inflation also matter; a strong economy often leads to CAD appreciation. When inflation increases, it tends to push interest rates higher, attracting global investors and supporting CAD. On the other hand, weak economic data can weaken CAD. A positive economic forecast encourages foreign investment, which can further boost the Canadian Dollar.

Geopolitical Risks In The Market

The proposed 100% tariffs from the U.S. have created significant uncertainty in the market and put immediate pressure on the Canadian Dollar. This type of geopolitical risk leads to increased implied volatility, which is crucial for options pricing. Traders are moving to protect themselves against a rapid decline in CAD. In this scenario, buying call options on the USD/CAD pair seems like a smart choice for the upcoming weeks. This strategy allows traders to benefit from a potential increase in the pair (indicating a weaker CAD) while limiting the downside risk to the premium paid. There is notable activity in contracts with strike prices above 1.3800. We recall the market turbulence during the 2018-2019 trade negotiations that resulted in the USMCA. Back then, similar threats caused sudden and sharp fluctuations in the Canadian dollar. This history indicates that current headlines should not be ignored, as they suggest trade may be used as a political tool. The pressure on the currency has been exacerbated by recently declining oil prices, a major Canadian export. West Texas Intermediate crude has fallen below $78 a barrel in the past month, creating challenges for CAD even before these new tariff threats arose. This economic weakness makes the currency more susceptible to shocks. The Bank of Canada now faces a tough situation, adding complexity for derivatives traders. The December 2025 inflation data is recorded at 2.8%, complicating any potential interest rate cuts that may be needed to bolster an economy facing trade risks. This conflicting policy will likely lead to increased currency volatility. The stakes are extremely high, as over $2 billion in goods and services move across the U.S.-Canada border every single day. Any disruption to this flow, or even the mere possibility of it, could lead to a reassessment of Canadian assets. Traders will be closely monitoring any official responses that might escalate or calm the situation. Create your live VT Markets account and start trading now.

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