Canadian Dollar: Binary tariff risks shape near-term path – TD Securities

TD Securities strategists highlight binary tariff risks affecting Canada's near-term path. A tentative agreement would slightly mitigate tariff risk premiums, benefiting the Canadian Dollar, while a deal breakdown carries a significant upside potential for the USD/CAD. Ongoing trade negotiations between the US and Canada are nearing a deal that could lower steel/aluminum tariffs to 25% and auto tariffs to 15%, reducing policy-imposed tariff rates by 1.5% and boosting GDP by 0.1-0.2 percentage points by year-end 2027.

The Bank of Canada is expected to proceed cautiously, awaiting further data on the impact of reduced tariffs before any rate hike in January 2026. Recent USD/CAD movements have been driven by broader US economic factors, including softer US data and reduced expectations of Fed rate hikes. Canadian economic resilience has provided some support to the CAD, but trade and tariff-related headlines have generated two-way volatility.

A resolved trade deal would modestly benefit the CAD by reducing tariff risk premiums, but the upside is likely limited, as tariffs still exist, USMCA uncertainty lingers, and Canada's negotiating position remains strong. The breakdown of talks, though underpriced, could trigger a sharp USD/CAD reversal.