Canadian Dollar: Tariff Risks Cloud Outlook - Commerzbank

Commerzbank analyst Michael Pfister assessed the potential impact of increased U.S. auto tariffs on Canada and the Canadian dollar. He believes the severity of the shock will largely depend on whether USMCA protections apply, but even if the actual tariff increase remains limited, deteriorating market sentiment could weigh on Canada's real economy. USD/CAD is currently trading near 1.38543.

**Tariff Shock Path Still Uncertain**

Pfister noted that since the relevant measures are not implemented until 2027, there is still room for negotiations and potential agreements before year-end. This implies the actual drag on the Canadian dollar from tariffs is not realized in one go, but is more likely to gradually build through expectation channels. Market reports show that the U.S. previously imposed new 50% tariffs on some Canadian dairy, alcohol, and automotive products under Section 338, revoking USMCA exemptions, and the Canadian dollar initially reacted mildly, but trade disputes are expected to dominate Canadian dollar-related news in the coming weeks.

**Sentiment Pressure May Precede Physical Impact**

Pfister emphasized that even if the final tariff increase is limited, the deterioration in market sentiment itself could weigh on Canada's real economy. This view aligns with Commerzbank's previous stance: losing the benefits of free trade could drag on Canadian exports, while tariff disputes will continue to trouble markets for an extended period, with surprises possible at any time. For the Canadian dollar, trade policy uncertainty itself is a suppressing factor.

**Negotiation Window Provides Buffer**

Since the measures are not implemented until 2027, Pfister believes there is still room for negotiations and potential agreements before year-end. This means the Canadian dollar faces sentiment pressure in the short term, but if negotiation progress or agreement signals emerge later, risk premiums could retreat. However, until the trade dispute outlook becomes clearer, the Canadian dollar is unlikely to escape a news-driven, volatile trading pattern.