Loonie Shrugs Off Trade War Talk Amid Minimal Tariff Impact

The Canadian dollar is unexpectedly resilient in the face of escalating trade tensions between Canada and the US. Despite the collapse of talks, USD/CAD has risen by 76 pips to 1.3840 or 0.55%.

This modest gain doesn't even return to Wednesday's opening levels, with a significant portion attributed to the 1.8% decline in oil prices.

The market's muted reaction can be attributed to the fact that not much was at stake in terms of US tariffs. The measures apply a 50% tariff rate on imports to the US but only affect about 5% of Canadian exports to that country, leaving more than 80% duty-free under USMCA exemptions.

The impact will be most felt in the auto sector, where companies and consumers may absorb the added costs. However, even this effect is expected to be minimal, with RBC estimating that the Canadian value-added content of newly tariffed U.S. imports adds up to ~0.4% of Canadian GDP and jobs.

The Canadian dollar's stability can also be seen as a reflection of Canada's counter-tariffs, which are set to take effect on September 7. This leaves a narrow window for the US to return to the negotiating table, with further escalation possible if tensions rise.