US President Donald Trump announced a potential 100% tariff on Canadian goods if Canada pursues a trade deal with China. Canada’s Prime Minister, Mark Carney, clarified that Canada has no plans for a free trade agreement with China, despite recent tariff reductions in certain areas.
At the time of writing, the USD/JPY pair increased by 0.03%, reaching 1.3701.
Factors Influencing The Canadian Dollar
The Canadian Dollar (CAD) is influenced by factors such as the Bank of Canada’s interest rates, Oil prices, economic health, and trade balance. Oil, being Canada’s largest export, directly affects CAD value, with higher prices generally boosting the currency.
Interest rate decisions by the Bank of Canada impact CAD, with higher rates typically benefiting the currency. Economic indicators, including GDP, employment, and inflation data, also play a role; strong economic performance often leads to CAD appreciation.
Increased inflation tends to prompt higher interest rates, attracting global investors and supporting CAD. Conversely, weak economic data can lead to a decline in CAD value. A positive economic outlook fosters foreign investment, further strengthening the Canadian Dollar.
Geopolitical Risks In The Market
The threat of 100% tariffs from the U.S. has immediately injected significant uncertainty into the market, directly pressuring the Canadian dollar. This kind of geopolitical headline risk causes implied volatility to spike, which is a key pricing component for options. We are seeing traders move to hedge against a sharp decline in the CAD.
Given this situation, buying call options on the USD/CAD pair looks like a prudent strategy for the coming weeks. This allows for profiting from a potential rise in the pair (a weaker CAD) while strictly limiting the downside risk to the premium paid. These threats are making contracts with strike prices above 1.3800 particularly active.
We remember the market whiplash during the 2018-2019 trade negotiations that led to the USMCA. During that period, similar threats caused sudden and sharp movements in the Canadian dollar. That history suggests this is not a headline to be dismissed, as it signals a willingness to use trade as a political tool.
This pressure on the currency is amplified by the recent softness in oil prices, a critical Canadian export. West Texas Intermediate crude has slipped below $78 a barrel in the last month, already creating a headwind for the CAD before these new threats emerged. This fundamental weakness makes the currency more vulnerable to shocks.
The Bank of Canada is now in a difficult position, which adds another layer for derivatives traders to consider. December 2025 inflation data came in at 2.8%, which complicates any potential interest rate cuts that might be needed to support an economy facing trade risks. This policy conflict will likely lead to more currency volatility.
The stakes are incredibly high, as we know that well over $2 billion in goods and services crosses the U.S.-Canada border every single day. Any disruption to this flow, even just the risk of it, forces a repricing of Canadian assets. Therefore, traders will be closely watching for any official responses that could escalate or de-escalate the situation.
