Trade Tensions Fuel Asymmetric Upside Risk in USD/CAD

Trade tensions between the US and Canada are escalating, presenting an asymmetric upside risk in USD/CAD. According to TD Securities, this tension reinforces the Canadian dollar's role as a carry funding currency. The bank estimates that Section 338 tariffs will shave around 0.3 percentage points from Canada's Gross Domestic Product (GDP) by 2027, with limited inflation impact.

This development supports an extended Bank of Canada (BoC) rate hold. TD Securities' models show the CAD as a funding currency, and they retain a bearish CAD view with a year-end USD/CAD forecast at 1.39. The bank notes that tariffs, carry, and the CAD's funding role are key factors in this scenario.

TD Securities also highlights that the US/Canada trade tension reinforces the CAD's role as a carry funding currency. This could lead to a more extended BoC rate hold due to the setback in the trade deal. Additionally, there are limited near-term catalysts that could push USD/CAD below its 200-day Simple Moving Average (SMA) at 1.3840.

The bank's models continue to show a bearish CAD bias against global currencies, with systematic factors broadly bearish on the Canadian dollar except for momentum and long-term fair value.