Canadian Dollar: Trade tensions and extended BoC hold – TD Securities

TD Securities highlights asymmetric upside risk in USD/CAD as US–Canada trade tensions escalate. 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, supporting a more extended Bank of Canada (BoC) rate hold. Their models show CAD as a funding currency, and they retain a bearish CAD view with a year-end USD/CAD forecast at 1.39.

Tariffs, carry and CAD funding

"Increased US/Canada trade tension reinforces the CAD's role as a carry funding currency. BoC rate hold could become more extended on the back of the trade deal setback; we also find little near-term catalysts that could push USD/CAD below its 200d SMA at 1.3840."

"Trade tension escalation between US and Canada presents asymmetric upside risk in USD/CAD and reinforces CAD's role as a carry funding currency in FX market."

"From a carry/vol perspective, CAD is now on par with JPY as a global funding currency. While USD/CAD spot price has rallied over the past week, the size of the move still trails below our estimated short-term fair value for this pair."

"MRSI model continues to hold a bearish CAD bias vs global currencies; systematic factors are broadly bearish CAD except for momentum and long-term fair value. We hold a near-term bearish CAD view and maintain 1.39 as our year-end USD/CAD forecast."