The Canadian dollar has further to fall on tariff chaos
At a Glance
The desk argues that the Canadian dollar (CAD) faces significant downside pressure due to escalating trade tensions and unexpected tariff chaos, which markets might not yet fully price in. Per the full note from ing-think, CAD is expected to underperform its G10 peers, exacerbated by the implications of the US imposing 50% tariffs on Canadian goods beginning January 2027 and retaliatory measures from Canada. Additional data suggest that while CAD had exhibited short-term resilience, structural economic headwinds loom larger given Canada's recent economic contraction in three of the last four quarters. The sentiment this month seems to predict a pivot towards dovish Fed re-pricing, which may also shelter gains for the USD against CAD, setting the stage for a challenging few months ahead for the loonie.
Key Takeaways
- 01CAD likely to underperform other G10 currencies
- 02Escalating trade tensions with the US pose serious economic risks for Canada
- 03Market expectations of dovish Fed influence CAD outlook
- 04Recent contractions in Canada's economy add further headwinds
Full Analysis
What the desk is arguing
The desk contends that the Canadian dollar is on a path to depreciate further amidst heightened trade uncertainty. Per the full note from ing-think, the outlook is especially bleak due to the recently implemented 50% tariffs on CAD exports worth USD 20bn, potentially triggering an adverse cycle for the Canadian economy.
Data shows that CAD has been relatively resilient, yet it is likely to lag behind other G10 currencies as the economic impact of tariffs becomes clearer. As highlighted, the recent contraction in Canada's economy and the prospect of dovish re-pricing in rate expectations suggest downward pressure on CAD in the near future.
Where it sits in our coverage
Currently, CAD's spot price is observed at 1.4100, with a consensus target of 1.3823 for March 2026, spanning a range between 1.3500 and 1.4034. Notable firm targets include: - morganstanley: Mar26 1.3800 - tdsecurities: Mar26 1.3940 - goldman: Mar26 1.3900
This view from the desk leans towards the lower bound of the spectrum, solidifying a bearish stance as the consensus suggests potential adjustments should the current trade distress worsen.
How other firms see it
The general sentiment among firms aligned with a weaker CAD includes morganstanley and goldman, both anticipating a decline. Meanwhile, firms such as citi, projecting a more bullish stance, see CAD recovering with targets as high as 1.4300.
Key intersections include USD/CAD's movements, highlighted by the dovish expectations surrounding the Fed's rate path, suggesting traders watch closely for shifts in the US monetary policy landscape as it impacts CAD dynamics.
Market Implications
Traders should monitor USD/CAD for potential upside movement as tariff impacts materialize. The current spot at 1.4100 could see continued pressure, especially if posed tariffs begin reflecting in economic data more sharply.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
ING | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Rabobank | Bullish | 1.1800 |
From the original
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The desk considers the recent imposition of steep U.S. tariffs on Canadian imports as a catalyst for increased volatility in the CAD/USD pair. Per the full note from RBC Thought Leadership, the 50% tariffs affect over 500 goods, translating to approximately 5% of Canada's export volume to the U.S., which is forecasted to be roughly US$20 billion. This targeted disruption highlights the economic vulnerabilities in Canada, particularly in the agricultural and automotive sectors, which may see immediate adverse impacts. Consequently, the CAD may come under pressure with broader implications for U.S.-Canada economic relations as retaliation is expected from Canada.
Monthly Executive Briefing: A tale of two economies
The desk posits that diverging economic narratives between the U.S. and Canada support a more bullish stance on CAD against the USD in the medium term. Per the full note from RBC, the Canadian economy is showing signs of resilience, underlined by robust employment figures, while the U.S. faces potential growth headwinds as interest rates plateau. This contrast is pivotal for traders, especially against the backdrop of recent central bank meetings that have left rates unchanged amid mixed economic signals.