Canadian Dollar: Trade Conflict Weighs on CAD – Commerzbank

USD/CAD is currently trading near 1.38297, with the Canadian dollar facing sustained pressure amid trade dispute shadows. Commerzbank analyst Michael Pfister noted that the latest breakdown in US-Canada trade talks and Ottawa's planned retaliatory tariffs indicate this trade conflict could persist for an extended period, which will dominate CAD-related news in the coming weeks.

**Escalating Trade Frictions Hit Export Outlook**

The US recently imposed new 50% tariffs on certain Canadian dairy, alcohol, and automotive products under Section 338 of the Tariff Act of 1930, while revoking exemptions under the US-Mexico-Canada Agreement. Commerzbank analyst Volkmar Baur believes that losing the benefits of free trade could weigh on Canadian exports, making this issue a key factor influencing the loonie's trajectory. Canada's economy is highly dependent on trade with the US, with 76% of exports concentrated in the US market, and increased trade barriers directly impact its export-oriented economy.

**Inflation and Policy Uncertainty Intertwine**

Canada's overall inflation rate for June came in slightly below the median analyst expectation, with the Canadian dollar showing a muted reaction. However, market signals indicate that the Bank of Canada has held its policy rate unchanged for the fifth consecutive time, with persistent economic weakness and an uncertain inflation outlook leaving the central bank in a dilemma. Geopolitical tensions in the Middle East have pushed oil prices higher, and combined with US tariff and trade policy uncertainty, the inflation outlook has become even harder to predict. If the trade dispute persists, damage to Canadian exports could further drag on economic growth, making it difficult to change the medium-term downward pressure on the Canadian dollar.