Insights 
VT 
Canada’s Prime Minister, Mark Carney, expressed disappointment with the United States’ decision to increase tariffs on Canadian exports to 35%. This increase applies to sectors such as lumber, steel, aluminium, and autos, which are not covered under the USMCA agreement.
While the US has signalled the possibility of further negotiations, tariffs will rise for multiple countries after the 1 August deadline, including Canada. Earlier, the tariff rate was at 25%, but it has now been raised by 10% as per an order signed by President Trump.
Market Volatility Predictions
With today’s news of a 35% tariff, we expect a major spike in market volatility. The Chicago Board Options Exchange’s Volatility Index (VIX) saw similar jumps during the trade disputes of the late 2010s, and traders should be prepared for a repeat. Buying call options on volatility ETFs could be a direct way to position for the uncertainty ahead.
The Canadian dollar is the most immediate casualty, and we see it weakening against the US dollar. Given that roughly three-quarters of all Canadian exports are destined for the US, this tariff hits the core of the economy. We are looking at buying put options on the loonie or going long on USD/CAD futures, betting on a decline in the coming weeks.
We expect the S&P/TSX Composite Index to come under significant pressure, especially the materials and industrial sectors. Companies in steel, aluminum, and auto parts are now facing a severe blow to their main market. Traders should consider buying put options on Canadian index ETFs like XIU to hedge portfolios or speculate on a downturn.
Interest Rate Outlook
This trade dispute significantly increases the chances that the Bank of Canada will cut interest rates to support the economy. We saw the Bank act ahead of the US Fed back in mid-2024 to address domestic conditions, setting a clear precedent. Traders could look at futures contracts on Canadian government bonds, anticipating that prices will rise as yields fall.
