USD/CAD rose 76 pips to 1.3840 after talks between Canada and the US collapsed late Friday, but the move undershoots the trade-war rhetoric. Most of the new 50% tariffs hit products already effectively blocked from the US market, and analysts peg the GDP impact at roughly 0.4%. The bigger risk sits in September, when Canada's counter-tariffs take effect.
USD/CAD gains lag the rhetoric
The Canadian dollar is the G10 laggard today, with USD/CAD up 76 pips to 1.3840, a 0.55% move, following the late-Friday collapse of trade talks with the US. Yet the pair has not even reclaimed Wednesday's opening levels.
A good chunk of the move traces to oil rather than trade. A 1.8% decline in oil prices accounts for a large share of today's rise in USD/CAD, one commentator argued.
Why the new tariffs barely move the needle
Not much is actually at stake in the latest measures. The 50% tariff rate applies to only about 5% of Canadian exports to the US, while more than 80% of exports remain duty-free under USMCA exemptions.
The new tariffs stack on existing levies covering steel, aluminum, lumber, and motor vehicles, and each sector reacts differently. Steel exports are already effectively blocked, so a higher rate changes little, and Canadian steelmakers are shifting toward the domestic market. Aluminum imports keep flowing regardless of tariff cost because the US has no domestic alternative at scale. Lumber trade is already curtailed by existing tariffs, though the mills on both sides of the border are also struggling with a slump in home building. Autos face the largest impact, but deep integration between Canadian and US automakers means companies and consumers will likely absorb the cost rather than halt production lines.
RBC estimates the Canadian value-added content of newly tariffed US imports at about 0.4% of Canadian GDP and jobs. That share of GDP is hardly a blip, and federal and provincial governments are already discussing stimulus to offset it. Canada's average effective tariff rate rises to around 6% from around 3%.
The real risk is further escalation
The loonie's move looks more like a reaction to what comes next than to the tariffs already in place. Canada's counter-tariffs are set to hit on September 7, leaving a narrow window for both sides to return to the table.
Trump's administration could respond to Canadian retaliation by escalating further, and one analyst noted that Trump's rhetoric so far hasn't turned escalatory, though that could shift quickly. The loonie hasn't weakened enough yet to make chasing the move worthwhile.
Source: InvestingLive
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