CAD: Trade Conflict Keeps Downside Risks vs USD Alive - ING

ING analyst Francesco Pesole said that as US-Canada trade tensions continue to escalate, the Canadian dollar's downside risks against the US dollar remain. The US announced new tariffs on Canadian automobiles and parts, set to take effect early next year, further weighing on market expectations for the loonie's outlook.

**Trade conflict caps CAD rebound potential**

The Canadian dollar had briefly staged a rebound, but the latest tariff threat interrupted that recovery. Market data showed that after US-Canada trade talks broke down, USD/CAD fell to around 1.3844, with the loonie among the worst performers in the G10. The pair is currently trading near 1.38603, still in the weaker range seen since the trade dispute escalated. Pesole stressed that the tariff implementation timeline for autos and parts means trade uncertainty is unlikely to fade in the coming months, leaving little room for a sustained CAD rebound.

**Tariff transmission path weighs on economic expectations**

The auto industry is a key pillar of Canadian exports to the US, and the new tariffs directly hit this core sector. Markets worry that tariffs will pressure the loonie through two channels: downward revisions to growth expectations and cooling rate-hike expectations. On one hand, weaker exports drag on the recovery momentum; on the other, a deteriorating outlook further trims expectations for Bank of Canada tightening. If Canada responds with equivalent retaliatory measures, business confidence and investment intentions could suffer a second blow.

**Near-term bias weak but one-sided moves questionable**

ING believes the near-term risk for the loonie remains tilted to the downside, but shifts in the US dollar's own rate-hike expectations could limit the scope for sustained, sharp USD/CAD gains. This suggests the exchange rate is more likely to undergo repricing within a high-volatility range rather than a definitive one-way trend. Going forward, watch for any signs of both sides returning to the negotiating table, as well as the actual impact on auto supply chain-related data.