A senior Canadian official revealed that U.S. President Donald Trump and Canadian Prime Minister Mark Carney plan to converse soon. This follows the U.S. decision to impose a 35% tariff on certain Canadian goods not covered under the USMCA trade agreement.
Dominic LeBlanc, Canada’s minister for U.S. trade relations, mentioned progress in talks with U.S. officials, including Commerce Secretary Howard Lutnick and Trade Representative Jamieson Greer. Despite advancements, a deal to reduce the tariffs has not yet been finalised.
Optimism For An Agreement
LeBlanc remains optimistic that an agreement can be reached to decrease tariffs and enhance investment certainty. The U.S. introduced the tariffs due to claims that Canada had not effectively countered fentanyl smuggling.
Canadian officials contest this, claiming Canada is responsible for about 1% of U.S. fentanyl imports and is actively working to reduce it further. This tariff imposition is the latest in a series of trade disputes, rekindled since Trump’s recent return to office.
Given the new 35% tariff and the upcoming call between U.S. and Canadian leaders, we expect heightened volatility in the coming weeks. The uncertainty surrounding the talks means traders should prepare for sharp moves in the Canadian dollar. Any news, positive or negative, from the meeting will likely cause an immediate market reaction.
Market Reactions And Strategies
The Canadian dollar has already shown weakness, dipping to a 10-month low of $0.71 USD last week. This is a significant drop from the $0.74 level we saw in May 2025, before this latest trade dispute flared up. Historically, during the 2018-2019 tariff disputes, the loonie saw similar periods of pressure, trading in a volatile range against the greenback.
Implied volatility on one-month USD/CAD options has surged above 11%, reflecting trader anxiety about the outcome of the talks. This suggests the market is pricing in a larger-than-usual price swing for the currency pair. We see this as an opportunity to consider strategies that benefit from this volatility, regardless of the direction.
The impact extends beyond currency, hitting Canadian equities tied to cross-border trade. Sectors like auto parts, specialty lumber, and certain agricultural products are particularly exposed, with Statistics Canada data showing these exports to the U.S. were valued at over C$55 billion in 2024. Traders are increasing bearish bets, with put option volume on the S&P/TSX 60 Index tracking ETF (XIU) rising nearly 40% in late July 2025.
In this environment, we are looking at options to hedge or speculate on further downside for Canadian assets. This includes buying put options on major Canadian stock market ETFs or purchasing call options on the USD/CAD pair. A surprise agreement could reverse these trends quickly, so positions must be managed carefully for a potential snap-back rally.
