Canadian Dollar Gains as Funding Currency Amid Tariff Tensions

9:16 AM ETDeveloping

Business Desk

In Short: The Canadian Dollar (CAD) is set to gain prominence as a global carry funding currency amid escalating trade tensions between the US and Canada, according to TD Securities.

Canadian Dollar (CAD) is set to gain prominence as a global carry funding currency, with its carry/vol profile already comparable to Japanese Yen (JPY), according to TD Securities.

The CAD has rallied to their 1.39 year-end forecast after new US tariffs, with further upside expected versus fair value as tariff impacts hit data and markets fade the Bank of Canada's recent hawkish narrative.

Despite previous tariffs increasing costs for manufacturers, car dealerships have absorbed the 'lion's share' to date, according to Bernard Yaros, lead economist at Oxford Economics.

The latest escalation has seen Canadian Prime Minister designate retaliatory import taxes on a host of US goods, with Saskatchewan and Alberta also imposing their own tariffs on US alcohol.

President Donald Trump has threatened to raise tariffs on Canadian vehicles from 25% to 50% from 1 January 2027, which could deal a further blow to the automotive industry.

What's confirmed

What's still developing

Donald Trump and Mark Carney have both declared tariffs on each other's country The US and Canada have been locked in a bitter trade conflict since President Donald Trump launched his tariffs policy on his return to the White House.
The Forest Products Association of Canada says tariffs would "raise costs on both sides of the border", while on the US side, Bill Owens, chairman of the National Association of Home Builders (NAHB) urged Trump to make building materials exempt from his tariff agenda due to an "ongoing housing affordability crisis".
Saskatchewan and Alberta are the only provinces that still sell American alcohol, but the former has announced its own 50% charge on US imported booze, set to kick in on 8 September, when the wider Canadian tariffs do.
"The recently threatened 50% tariffs on Canadian autos, trucks, and car parts would feed through to consumer prices more readily than before." Yaros thinks higher costs on imports to the US could accelerate a trend of manufacturers prioritising luxury cars, SUVs and pick-up trucks and push up prices in the used-car market if supplies of new but less-expensive vehicles becomes tight.
Construction materials such as steel, aluminium as well as lumber wood have had tariffs in place before the latest escalation, though Canada has now matched US rates on the metals at 50%.
The US Dollar stays under pressure as a rallying Japanese Yen outweighs support from hawkish Fed bets and geopolitical tensions.
President Donald Trump on Monday said Canadian aircraft manufacturer Bombardier should no longer be allowed to sell its planes in the United States unless it manufactures them domestically.
Earlier this year, Trump threatened to decertify Bombardier Global Express business jets and impose 50% tariffs on Canadian-made aircraft unless Canada certified several Gulfstream business jets.

Sources

FXStreetlink