Royal Bank of Canada has assessed new Section 338 US tariffs on Canadian exports, set at 50% and covering goods that make up about 5% of Canada’s exports to the United States. The measures are presented as concentrated on Canada and are framed as a renewed escalation of tariff actions, with potential spillovers into wider CUSMA trade relations. RBC flags that the levy could make affected Canadian goods prohibitively expensive in the US market, while also creating scope for trade flows to reorient within North America to reduce tariff costs.
The bank identifies plastics, electrical machinery, furniture and wood products as the main sectors exposed, with impacts expected to be more concentrated in Quebec, British Columbia and Ontario. RBC says the tariff headwinds are narrowly based across a small set of industries and points to fiscal policy as the more targeted channel for relief, alongside reports that government supports may follow this latest round. On monetary policy, it expects the shock to be insufficient to prompt the Bank of Canada to pivot to rate cuts, while adding that moderating underlying inflation excluding energy increases the likelihood the BoC will not raise rates this year.
Currency, Rate and Bond Market Impacts
With the U.S. imposing a steep 50% tariff on 5% of Canadian exports, we expect near-term volatility for the Canadian Dollar (CAD). Since these tariffs target roughly $25 billion in trade goods, derivative traders should consider buying short-dated USD/CAD call options to hedge against CAD weakness. The heavy concentration of economic pain in Ontario, Quebec, and British Columbia will likely keep the Canadian currency under pressure in the coming weeks.
We believe the Bank of Canada is highly likely to keep interest rates on hold rather than hike them, especially as underlying inflation has cooled toward the 2% target. Derivative traders should position for this pause by trading Canadian Overnight Repo Rate Average (CORRA) futures or utilizing receiver swaps. Historically, during times of trade friction, Canadian bond yields tend to drift lower, making long positions in 10-year government bond futures an attractive play.
Sectoral Impact and Trading Opportunities
Specific sectors like forestry, plastics, and electrical machinery are facing severe headwinds, presenting prime opportunities for equity options traders. We recommend buying put options on major Canadian industrial and forestry stocks, as the 50% tariff makes their U.S. exports prohibitively expensive. Historically, during the trade disputes of 2017, targeted Canadian exporters saw their share prices drop by double digits in the month following tariff announcements.
While these tariffs are painful, expected government fiscal aid could quickly cushion the blow for affected industries. Traders should monitor corporate credit default swaps for these impacted industrial firms, as incoming government bailouts may compress credit spreads sooner than the market expects. Keeping a close eye on how quickly these trade flows reorient within North America will help us time our exits from short industrial positions.
