Trade Tensions Fuel CAD Strength Amid BoC Rate Hold

The Canadian dollar is facing asymmetric upside risk due to escalating trade tensions between the US and Canada. According to TD Securities, Section 338 tariffs are expected to shave around 0.3 percentage points from Canada's Gross Domestic Product (GDP) by 2027, with limited inflation impact. This development supports a more 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 analysts attribute this to tariffs, carry, and the CAD's role in funding other currencies. They also note that there are limited near-term catalysts to push USD/CAD below its 200d SMA at 1.3840.