The U.S. and Canada have intensified their trade dispute after new retaliatory measures took effect, adding pressure on the Canadian dollar as investors assess the economic impact of tariffs, higher oil prices, and rising inflation risks.
The United States introduced import bans on a wide range of Canadian alcoholic beverages, motorcycles, and dairy products on Tuesday after Canada’s own retaliatory tariffs on U.S. goods came into effect. The measures mark another escalation in trade tensions between the two countries, which maintain one of the world’s largest economic relationships.
Canadian Dollar Under Pressure
The Canadian dollar weakened following the announcement, despite stronger crude oil prices that would normally support the currency.
“Despite firmer crude oil prices, the overhang from the new retaliatory tariffs from the U.S. has dampened short-term CAD sentiment, sending the loonie lower today,” said George Davis, chief technical strategist at RBC Capital Markets.
Canada is particularly exposed to trade disruptions because approximately 70% of its exports are sent to the United States, including a significant share of its energy exports.
Oil Prices Add Inflation Pressure
Rising tensions in the Middle East have added another challenge for the Canadian economy. Brent crude futures recently moved above $100 per barrel for the first time since July 24 as attacks on energy infrastructure and oil tankers increased concerns about supply disruptions.
Higher oil prices are contributing to broader inflation pressures worldwide, including in Canada, where policymakers are monitoring the impact on consumer prices and economic growth.
Bank of Canada Rate Hike Expectations Increase
Markets have fully priced in expectations that the Bank of Canada could raise interest rates by December after Governor Tiff Macklem indicated that policymakers may need to increase borrowing costs multiple times if inflation remains elevated.
Investors are also watching upcoming U.S. inflation data, which could influence expectations for a Federal Reserve interest rate decision in the following week.
Bond Yields Continue Rising
Canadian government bond yields moved higher across the curve, following similar moves in U.S. Treasury markets.
The 10-year Canadian government bond yield increased 3.8 basis points to 3.849%, reaching its highest level since May 2024 as investors adjusted expectations around inflation, interest rates, and global economic risks.
The combination of trade tensions, elevated energy prices, and tighter monetary policy expectations is creating additional uncertainty for Canada’s economic outlook.
