Trump expressed that the newly imposed tariffs are proceeding smoothly and showed a willingness for further trade discussions, including with Canada. This statement was made just hours after an executive order increased tariffs on Canadian goods from 25% to 35%, affecting products not covered by the USMCA.
Despite the tariff increase and its impact on bilateral relations, Trump indicated openness to diplomacy, possibly speaking with Canadian Prime Minister Mark Carney. This follows White House efforts to pursue what is deemed “fairer” trade terms, though concerns exist about the potential disruption to supply chains and economic relations in North America.
Current Market Situation
Currently, USD/CAD remains relatively stable at 1.3858.
The current standoff presents a classic scenario of policy-driven volatility. The market’s muted reaction, with USD/CAD holding near 1.3858, shows traders are weighing the concrete tariff hike against the possibility of diplomatic resolution. We should therefore expect implied volatility on USD/CAD options to rise in the coming weeks.
Given this uncertainty, buying volatility through strategies like straddles or strangles could be prudent. This allows a trader to profit from a significant price swing in either direction, which could be triggered by either a successful dialogue with Prime Minister Justin Trudeau or a further escalation. A large move is more likely than a period of calm.
Historical Context and Current Trends
Looking back, we saw a similar pattern during the 2018-2019 trade disputes when US tariffs were imposed on Canadian steel and aluminum. In that period, USD/CAD climbed from around 1.29 to over 1.36 over several months as uncertainty persisted. History suggests the path of least resistance for the currency pair is upward as long as the tariffs remain in place.
Recent data adds to this view, as Statistics Canada just reported a 0.8% dip in manufacturing exports for June 2025, reflecting early signs of strain even before this tariff increase. This makes the Canadian economy particularly vulnerable to new trade barriers. For traders with a directional bias, buying USD/CAD call options offers exposure to further Canadian dollar weakness while strictly limiting downside risk if talks succeed.
Any headlines regarding the potential phone call between the leaders will be a major catalyst. A positive outcome could cause a sharp drop in USD/CAD, erasing recent gains quickly. Conversely, a statement confirming a breakdown in talks would likely send the pair sharply higher toward the 1.40 mark.
