The Canadian dollar has experienced a steep decline following the announcement of a 35% tariff rate imposed by the United States. This marks an increase from the current two-tiered tariff rates of 10% and 25%.

The announcement did not clarify if exclusions for trade compliant with the USMCA will continue. This tariff is separate from any sector-specific levies already in place. There is potential for the tariff rate to be reduced if Canada collaborates with the US to combat the issue of fentanyl.

Tariff Rates And Adjustments

The tariff rate is subject to adjustments, potentially increasing or decreasing based on the state of US-Canada relations. The commencement date for this new tariff rate is set for 1 August.

The recent imposition of a single 35% US tariff on Canadian imports stands in contrast to the previously split levels of 10% and 25%, which were applied according to goods and origin compliance. The existing framework allowed for some stratification depending on engagement with USMCA standards. Now, clarity on whether this treatment will persist is yet to be provided, and that uncertainty poses immediate challenges for pricing forward contracts and calibrating premium structures across North American currency pairs.

With the tariff launch anchored to 1 August, the immediate implication is increased demand for short-term US dollar contracts, driven by firms and investors hedging anticipated CAD depreciation. Typically, headline-sensitive moves like these provoke an initial liquidity crunch, particularly in longer-dated options where participants struggle to price asymmetric downside risk to the Canadian side of the curve.

Interestingly, the language surrounding the policy adjustment—particularly suggestions that concessions may follow joint cooperation on broader geopolitical efforts, such as fentanyl reduction—hints at a more flexible mechanism rather than a hard policy line. That negotiable tone should not be mistaken for ambiguity. It instead suggests that repricing across forward-dated instruments must now contain a variable risk premium, which will respond not only to domestic economic data but also to bilateral diplomatic signals. For that reason, weekly volume in near-dated CAD puts has already expanded sharply, particularly in tenors straddling the 1 August date.

Impact On Currency Markets

We also note that these shifts will likely alter open interest distributions across the IMM currency futures series. The spot impact—while visible—doesn’t fully capture how volatility skews have begun to widen on the downside, suggesting expectations of prolonged pressure rather than a one-off repricing. Given that, models relying on correlated interest rate expectations will require revision, particularly where cross-currency basis spreads misprice potential capital flow disruption.

Vol dealers won’t be alone in needing to revise. Hedgers with passive rollover positions into the third quarter face the problem of asymmetric exposure to repricing, particularly if preferential tariff exemptions fail to materialise. Thus, gamma exposure around CADUSD pairings needs to be managed without relying on historical correlation assumptions, which are less meaningful in a politically charged repricing environment.

Others may look to proxy exposure by shifting weight into northern European currency baskets or exploring short CNH pairings where volatility transfer provides more attractive convexity. That said, this strategy should be employed with caution—cross-asset cues suggest that spillover into North American equity risk is possible, which could compound the effect on local unit demand.

In terms of structural play, there’s currently too much variance in tariff guidance to rely on calendar spreads unless contingent options are layered in. Moreover, the possibility that both tariff repeal and escalation now depend on non-commercial cooperation means any assumption of linearity from here is flawed. Importantly, the absence of dollar liquidity constraints doesn’t imply constraint-free forward pricing for the loonie. We position accordingly, maintaining optionality around repricing announcements as fiscal clues emerge through diplomatic backchannels.

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