Canadian Dollar: Tariff risks cloud outlook – Commerzbank

Commerzbank's Michael Pfister examines the potential effects of higher US auto tariffs on Canada and the Canadian Dollar. The severity of the impact will be contingent on the applicability of USMCA protection, but Pfister suggests that a decline in sentiment could adversely affect Canada's real economy, even if the tariff increase remains minimal.

Given that these measures were announced well before 2027, there may still be room for negotiations and an agreement before the year-end. The US President recently announced a moderate increase, with car tariffs rising from 25% to 50% from January 1, 2027. This would affect a larger share of Canadian exports to the US compared to the recent tariffs that went into effect, which are estimated to have covered about USD 20 billion worth of goods.

Depending on the scenario, the impact could be more significant (without USMCA protection) or manageable (with USMCA protection). In April, Pfister observed that prevailing sentiment holds more weight than the tariff increase itself, implying that the Canadian real economy could still be significantly impacted even with a slight rise in the effective tariff rate.

However, there is a positive aspect: the new US tariffs were announced ahead of time, potentially allowing time for negotiations. Additionally, yesterday, the US President discussed the dependence of the country on aluminium imports from Canada, which may lead to an agreement by the end of the year.