Canadian Dollar Faces Further Decline Amid Escalating Trade Tensions

ING Groep is forecasting further weakness in the Canadian dollar due to escalating trade disputes between the United States and Canada. The firm believes that the USD/CAD exchange rate will rise to around 1.39 by the end of Q3, but medium-term gains are expected to be limited.

The US-Canada tariff dispute has seen the imposition of a 50% tariff on approximately CAD 20 billion worth of Canadian goods and plans for tariffs of the same magnitude on Canadian automobiles, parts, and steel products starting January 1, 2027. In response, Canada announced that it would implement retaliatory tariffs of comparable scale starting September 8.

ING Groep's forecast suggests that despite significant escalation in trade friction, the USD/CAD exchange rate has risen by only about 1% since the breakdown of negotiations; excluding the effect of the broader strengthening of the US dollar, the Canadian dollar has declined by only about 0.5 percentage points against other currencies.

The restrained market reaction reflects ongoing expectations that negotiations will resume, with investors holding onto hopes for a resolution to the trade dispute. However, ING Groep believes that the tariff shock has not been fully priced in and could face greater downward pressure if expectations for negotiations fail to materialize.