Canada’s Prime Minister Carney suggests that US tariffs on international trade may persist. Evidence indicates no country or jurisdiction is currently able to evade these tariffs.
The upcoming US tariffs on Canadian goods are set at 35% starting from August 1. However, there might be some leeway, with expectations that tariffs could generally stabilize between 10% and 20%.
Outlook On Tariffs
Donald Trump anticipates companies absorbing much of the tariff-induced cost increase. He regards tariffs as a form of taxation for conducting business in the US and as recompense for perceived unfair trade practices. Trump conditions tariff reductions on the elimination of tariffs on US exports.
Our read on the situation, especially considering Carney’s remarks, is that the market is underpricing the risk of a renewed trade conflict. Trump’s view of tariffs as a permanent negotiating tool, rather than a temporary measure, is a structural shift. The coming weeks are not about predicting the final outcome, but about positioning for the turbulence that the negotiation itself creates. Volatility is the clearest trade.
We see an opportunity in the currency markets first and foremost. The Canadian dollar is exceptionally vulnerable. With over $2.5 billion in goods and services crossing the border daily, any tariff, even at the 10% level, creates an immediate drag on the Canadian economy. The USD/CAD exchange rate, currently hovering around 1.37, doesn’t reflect the kind of panic that a 35% tariff threat would induce. During the less severe 2018 tariff disputes, the Loonie weakened by over 8% in just a few months. We should be looking at buying long-dated call options on the USD/CAD, betting that the pair will move towards 1.40 and beyond as negotiations intensify.
Investment Strategy
Beyond the currency, the pain will not be evenly spread, and we can exploit this with options on specific sectors. U.S. tariffs would be a direct assault on Canada’s S&P/TSX Composite Index. We should be buying puts on broad Canadian index ETFs as a starting point. Digging deeper, Statistics Canada data shows that motor vehicles and parts represent Canada’s largest export category to the U.S., valued at over $80 billion annually. This makes Canadian auto part manufacturers like Magna International or Linamar Corporation extremely exposed. We can build bearish positions here through puts or by shorting their stock outright. Similarly, the Canadian lumber and aluminum sectors will be directly in the crosshairs.
Historically, these trade spats create a clear divergence. While the overall market might dip, the targeted sectors get hammered. The key is to act before the rhetoric truly escalates. With a U.S. election on the horizon, the probability of headline-driven volatility is extremely high. Trump’s playbook is well-known, and we should use that historical data to structure our trades now, while the cost of protection, and speculation, remains relatively cheap. We are buying volatility and betting on a weaker Loonie.
