The Canadian dollar has further to fall on tariff chaos
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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
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.
Risks to this view
A rapid de-escalation in trade tensions or unexpected Federal Reserve actions could invalidate the bearish outlook on CAD. Additionally, strong GDP data in the upcoming releases could temper the anticipated depreciation.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
ING | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Rabobank | Bullish | 1.1800 |
Articles The Canadian dollar has further to fall on tariff chaos Published 16:44 FX Canada Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Markets may be underestimating the economic costs of trade uncertainty for Canada. We expect CAD, which has remained relatively resilient so far, to underperform most other G10 currencies in the coming months. USD/CAD still has scope to move higher in the very near term, although gains may later be capped as we see dovish Fed repricing weighing on USD Francesco Pesole and James Knightley Despite its recent resilience, we expect the Canadian dollar to underperform its G10 peers on dovish repricing in rate expectations and a rising tariff premium What’s happened and where we stand – in a nutshell Following the collapse of negotiations on 22 August, 50% US tariffs on roughly USD 20bn of Canadian goods have come into effect.
President Trump has also announced 50% tariffs on Canadian autos, auto parts and steel from 1 January 2027. In response, Canada has unveiled dollar-for-dollar retaliatory tariffs worth USD 20bn, set to take effect on 8 September, including 50% levies on steel and aluminium (discussed by our commodities team here ). Latest media reports suggest the US administration is considering further trade penalties, with Canada prepared to retaliate again if needed.
While US Vice President JD Vance said talks with Canada are “still ongoing”, Canadian PM Mark Carney had previously indicated there was little prospect of negotiations resuming before the 5 November US midterms. Growth headwinds re-intensify This comes at an unfortunate time for the Canadian economy. After contracting in three out of the past four quarters, a period of trade stability was prompting optimism to return.
That will be evident in Friday’s second-quarter GDP release, which is expected to show annualised growth exceeding 3%. Similarly, Canada’s labour market was displaying renewed signs of life, having added 181,100 jobs over the past three months after losing 112,300 in the first four months of the year. An escalation of trade tensions, creating business uncertainty and consumer anxiety about the implications for jobs and inflation, risks stopping these improvements in their tracks.
While tariffs will put up costs, which will add to price pressures, it may also mean some squeeze to corporate profits as the burden is shared. The one bit of positive news is that inflation is currently within the Bank of Canada’s target band, which offers some time for the central bank to assess the growth and inflation implications. Markets have reduced the pricing around potential Bank of Canada rate hikes – at the start of the week, 63bp of cumulative hikes was priced for April 2027, but today that is only 44bp.
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