Published: August 20th, 2025
The Pound rose to a new six-week high over the Canadian Dollar against a backdrop of US Dollar weakness and Canada's growing trade tensions with China.
Ottawa is now fighting a tariff war on two fronts, both with its key trading partner south of the border and across the Pacific with the number one export destination for some of the country's major agricultural exports.
Beijing said on Tuesday it would set a punishing 75 per cent anti-dumping duty on Canadian canola imports, another escalation in what's become a tit-for-tat tariff exchange between the two nations.
The spat with China started last year when Canada set a 100% tariff on imports of Chinese electric vehicles (EVs) in March. China countered by levying tariffs on a range of agricultural goods from Canada, including canola seeds.
A note to investors from CIBC's FX Strategy Unit said the canola escalation is significant for CAD.
“Given the exports of Canadian canola seed to China were worth close to C$5 billion last year, the continually rising tariffs will be painful for the domestic agricultural sector, especially in grain-growing prairie provinces like Saskatchewan. China's latest volley in the trade battle puts major pressure on the Canadian government, with Saskatchewan Premier Scott Moe attacking Ottawa in the press.”
The bank's analysts go on to say that a damaging political narrative is emerging that suggests the minority federal Liberal government, which won most of its seats in Ontario and Quebec, is ready to sacrifice a vital Western Canadian industry to protect Eastern Canadian EV firms.
In July, US President Donald Trump launched his latest trade assault in Canadian exports, levying a new 35 percent tariff on Canadian goods.
The White House sent an official communique to Canadian Prime Minister Mark Carney, in which Trump said the decision was triggered by Canada's foot-dragging on US demands to take action on the illicit fentanyl trade, much of which the US says is made in Canada. He also pointed to Canadian inaction on current tariffs against US imports, including a punishing 400% duty on American dairy products.
The new rate was enacted on August first, and the US said the percentage figure could go higher if Canada retaliates in kind.
In a note to investors published after the announcement, RBC's forex strategy unit noted that current US trade negotiations with Canada need to be resolved by the end of July, according to a timetable set by Washington.
‘The timing of the new tariff strongly suggests Trump is unhappy with the pace of progress in discussions with Ottawa, putting Canada next in the trade dispute crosshairs.’
The White House move follows a snap decision in late June to hit Brazil with a 50 per cent duty.
Recently-elected prime minister Carney will have been trying to sidestep another trade conflict with Washington, but Trump's latest move makes that approach untenable.
Following the release of the letter to the press, the Canadian Dollar sank broadly lower, falling against most other G10 majors.
‘The loonie is stalling as trade uncertainty intensifies,’ RBC analysts wrote. ‘The performance seen this week consolidates CAD's status as the worst-performing G10 against the Greenback this year.’
So far, however, RBC says the losses for CAD have been relatively modest and could have been worse, given the size of the US tariff.
In May, a note to investors from Morgan Stanley said the Wall Street bank had turned CAD seller given a backdrop of trade uncertainty.
‘The challenging global trade environment paired with downside growth risks from below the border bodes poorly for the Canadian Dollar,’ Morgan analysts wrote. ‘A US slowdown would have negative spillovers for the Canadian economy, exposing it in ways that other G10 economies won't experience.’
Tightly interlinked trade between the two countries becomes a risk rather than benefit in this scenario, according to Morgan Stanley. While American economic prints continue to point to robust growth in the face of elevated trade uncertainty, Morgan economists believe signs of a slowing economic pulse will soon appear.
Canada's economy depends on US imports and supply chains. If trade relations between the two countries sour further under Trump, any slowdown south of the border would weigh heavily on Canadian domestic growth.
The potential for additional weakness in Canadian output has central bankers in Ottawa watching for signals to cut interest rates again, which could undermine the Loonie's interest rate support.
‘Recent comment from the Bank of Canada (BoC) points to some members of the Governing Council favouring a cut at the next meeting rather than holding course,’ notes Morgan Stanley.
The BoC's April meeting summary suggested policy setters were watching for weakening business and consumer confidence data.
A February 2025 note to investors from Deutsche Bank predicted that the Canadian Dollar could test new all-time lows this year if the new Trump administration levied its proposed 25 percent import tariff on Canadian goods.
The pre-inauguration threat made by Trump via X and his own Truth Social network sent the Loonie hurtling Earthward. Canadian officials have responded angrily, with then Prime Minister Justin Trudeau saying that Canada would respond ‘dollar for dollar’ with retaliatory tariffs of its own.
Deutsche analysts wrote that the very real prospect of an escalating US-Canada trade war would be a ‘worst-case scenario’ for Canada's domestic economy and CAD.
‘Should American tariffs go ahead, it's natural to assume Ottawa will fight back with tariffs of its own, and in product categories similar to those targeted in the previous 2018 Trump tariff battle. What's different today is that the Canadian government has also mooted the idea of export taxes on commodities. In a trade battle with the US this could give Canada real leverage, despite its much smaller economy.’
