There is growing optimism in the market for a permanent reduction in US tariffs following a 90-day moratorium. US trade policies, particularly with Canada, are seen as a burden on the USD.

Recent developments have emerged after the Canadian government reversed a decision on a digital tax that would mainly impact US tech companies. The potential increase in US tariffs on Canadian goods posed risks to both economies.

Key Market Concerns

The US trades essential goods, like crude oil and base metals, from Canada, and serves as a key market for US products. Any retaliatory measures from Canada could harm the US economy, creating uncertainty about the effectiveness of current trade strategies.

It’s important for market participants to understand the risks and uncertainties presented by these trade policies. Such policies could lead to adverse economic effects, presenting challenges to the USD’s strength.

These recent moves between Ottawa and Washington have introduced new weight on the greenback, largely as a result of shifting expectations around long-term trade arrangements. With the 90-day pause now in place, there’s a sense in the markets that the US may seek to reduce tariffs permanently, especially if the political cost of maintaining them begins to outweigh their perceived benefit. This perception, however, exposes the dollar to renewed weakness, particularly in cross-border pairs with economies reliant on US trade flows.

The Canadian government’s u-turn on the proposed digital tax, which would have primarily targeted American tech giants, must be seen through the lens of broader negotiations. It has, in effect, removed a key point of contention and softened the chances of an immediate escalation. Washington finds itself recalibrating, presumably to avoid destabilising a core bilateral relationship. The divergence from earlier rhetoric, which leaned heavily on protectionist themes, hints at internal uncertainty and external pressure.

Broader Implications

For us trading derivatives, especially those tied to currency volatility or commodity flows, this context matters. North American supply chains are tightly linked, particularly in sectors like energy and raw materials. If political tensions translate into longer-term trade barriers, we risk seeing dislocations in commodity pricing. Crude oil and base metals like copper, both staples of the trade between the two nations, are vulnerable to sudden swings. These moves may not necessarily arise from shifts in supply or demand fundamentals but from policy-induced bottlenecks.

Thompson’s position on the digital tax now alleviates some strain, but it also exposes how reactive policy manoeuvring can destabilise forecasts. The US administration faces pressure to maintain growth momentum while balancing populist trade policies that have growing political consequences. Retaliation—if it were to reappear in another form—might not be headline-grabbing, but could instead show up in more nuanced barriers, such as regulatory slowdowns or inspections on imports. Therefore, we need to keep a tight watch on legislative developments that can ripple into spot market positioning and derivatives pricing.

It will be essential to monitor inflows into USD assets over the next few sessions. Bond markets, in particular, may show early signs of sentiment shifts. If we see flattening in the curve at the long end, it might suggest market hesitation about medium-term US economic strength under these trade assumptions. This isn’t just an FX story—it’s also playing itself out through interest rate futures and options. The pricing of hedges against dollar depreciation could begin shifting subtly. Look for increased demand in protective puts on dollar indices or cross-currency swaps with a North American focus.

Michaels’ remarks on North American integration last week, while cautious, underline the fragile balance emerging between cooperation and strategic posturing. If trade frictions surge again, even within adjusted frameworks, there’s strong potential for higher short-term implied volatility in both FX and commodity-linked derivatives. For now, the market is leaning towards de-escalation—but any deviation from that path will likely result in a burst of re-pricing.

In this environment, taking directional positions without accounting for event risks tied to ongoing negotiations carries increased hazard. Structured approaches that spread exposure across potential scenarios—particularly those involving softening growth projections—are likely to be more resilient. Time spreads in crude oil contracts, synthetic Canadian dollar straddles, and volatility arbitrage trades within tech-heavy indices could all offer calculated paths forward, assuming risk is appropriately sized.

Once the 90-day clock winds down, everything not agreed becomes negotiable again.

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