Canadian Dollar: Trade Dispute Risks Weigh on CAD – BNY

BNY Mellon analysts note that after Ottawa's retaliatory measures, Washington is considering further trade penalties against Canada, with trade dispute risks continuing to weigh on the Canadian dollar. USD/CAD briefly rose to 1.3844 during Monday's session, with the loonie leading losses among G10 major currencies.

**Trade Talks Collapse Triggers Selloff**

According to Bloomberg, the Canadian dollar plunged as much as 0.6% against the U.S. dollar early Monday, marking its worst single-day performance since June 17. Canadian Prime Minister Carney said retaliatory tariffs on steel, dairy, agricultural equipment, and other goods would take effect September 8. U.S. Trade Representative Greer questioned Canada's last-minute demands, calling them "economically unreasonable." Trump subsequently announced a 50% tariff on all Canadian automobiles, parts, and steel products effective January 1, 2027.

**Institutions Warn of Downside**

MUFG forecasts the Canadian dollar could fall further to 1.41 per U.S. dollar in Q3 amid the escalating trade war. Brown Brothers Harriman strategist Haddad notes that interest rate swap markets had previously priced in roughly 70 basis points of rate hikes by the Bank of Canada before June, but if the trade war continues to escalate, markets are likely to scale back those expectations, keeping the loonie under pressure in the near term. However, Haddad also emphasized that the trade war poses inflation rebound risks for the U.S. side as well, which could limit USD/CAD's upside beyond the 1.4000 level.

**Bullish and Bearish Factors Intertwine**

VT Markets analysis suggests oil prices could provide some support for the Canadian dollar. As Canada is a major energy exporter, new U.S. sanctions on Iran could push crude prices higher, limiting the loonie's losses, with USD/CAD's upside potentially capped at the 1.3929 resistance level. On the technical front, attention should focus on the 1.3846 resistance line and the 1.3732 support floor; a break above the former would target the 1.4000 level. USD/CAD is currently trading around 1.38705, with markets still digesting the latest developments in the trade dispute.