The Canadian dollar remained stable despite a recent increase in tariffs imposed by the US. The USD\/CAD rate has reached its 10-week high, indicating the Canadian dollar is at a 10-week low.<\/p>\n
US tariffs on Canadian goods have been raised from 25% to 35%. The new tariff rate is set to be implemented in a few hours as US Eastern time shifts to August 1.<\/p>\n
With the new 35% tariff going into effect, we see sustained downward pressure on the Canadian dollar. The move to a 10-week low for the CAD is likely just the beginning of a larger trend. We are positioning for further weakness against the U.S. dollar in the weeks ahead.<\/p>\n
This trade action hits an already fragile Canadian economy, where Q2 GDP growth recently slowed to just 0.8% annualized. Conversely, the latest U.S. non-farm payrolls data showed a robust gain of 215,000 jobs, keeping the Federal Reserve on a steady path. This growing economic divergence strongly favors holding U.S. dollars over Canadian dollars.<\/p>\n
For derivative traders, the spike in uncertainty is a key opportunity. Implied volatility on USD\/CAD one-month options has jumped to over 10%, levels we haven’t seen since the banking stresses in the spring of 2024. Strategies that profit from increased price movement, such as long straddles, should be considered.<\/p>\n
We believe USD\/CAD will test higher levels, potentially targeting the 1.4000 psychological mark. We saw a similar pattern during the trade disputes of 2018, where escalating tariff rhetoric caused the pair to rally over 8% in just a few months. History suggests this trend has more room to run.<\/p>\n
The market is now aggressively pricing in a response from the Bank of Canada. Overnight index swaps are now implying a greater than 70% chance of a 25-basis-point interest rate cut by the October meeting. This expectation of monetary easing will cap any potential rallies in the Canadian dollar.<\/p>\n
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