Canadian Dollar: Trade War Escalation Threatens Recent Strength – MUFG

USD/CAD is currently trading near 1.38359, as markets assess the impact of escalating US-Canada trade tensions on the Canadian dollar's recent strength. MUFG analyst Derek Halpenny noted that the loonie's reaction to new US tariffs on approximately $200 billion of Canadian exports will depend more on subsequent escalation risks than the initial measures themselves.

**Tariff Escalation and Retaliation Risks**

According to Sing Tao Daily, following the collapse of US-Canada trade talks, the US imposed 50% tariffs on approximately $200 billion of Canadian goods. Canadian Prime Minister Carney immediately announced equivalent retaliation effective September 8, targeting steel, dairy products, home appliances, agricultural equipment, pulp and paper, and electronics. Carney stated bluntly that the two countries "will not return to their past relationship" and accused the US of "weaponizing economic integration." This stance has intensified market concerns over further friction.

**Loonie Sensitivity and Economic Vulnerability**

Nearly three-quarters of Canada's merchandise exports flow to the US, whose economy is roughly 10 times the size of Canada's, limiting Ottawa's room for retaliation without causing disproportionate domestic damage. MUFG's Halpenny believes that if escalation risks continue to heat up, the loonie's recent strength may face reversal pressure; conversely, if both sides return to the negotiating track, the Canadian dollar could gain some relief. Market reports indicate investors are closely monitoring any diplomatic signals ahead of the September 8 effective date of Canada's retaliatory tariffs.

**Near-Term Focus**

According to Yahoo Finance, US President Trump has also threatened 50% import tariffs on Canadian-made aircraft, suggesting the trade friction scope could expand further. Against this backdrop, the loonie's sensitivity to risk sentiment has risen notably. At the time of writing, USD/CAD remains within its recent trading range, with the next move depending on whether both sides signal any de-escalation.