CAD Faces Binary Tariff Risks Ahead of Section 338 Deadline

Canadian Dollar (CAD) investors are bracing for binary tariff risks that could shape the currency's near-term path. TD Securities strategists warn that a tentative deal between the US and Canada to avoid Section 338 tariffs would reduce tariff risk premia, but only slightly, and support the CAD.

However, they stress that a breakdown in talks is underpriced and could trigger a sharp USD/CAD move higher as policy uncertainty around the United States-Mexico-Canada Agreement (USMCA) persists. Trade talks between the US and Canada have intensified ahead of Saturday's deadline to avoid 338 tariffs.

TD Securities notes that even if a deal is finalized by Saturday, the Bank of Canada will want to see more data on the impact of lower tariffs, which won't be available until November. As a result, the Bank will likely stay on hold through 2026 before hiking in January.