A potential US-Canada tariff deal could lift CAD and GDP by 0.2pp, but breakdown risks remain underpriced, TD Securities warns.
Section 338 tariff negotiations between the US and Canada present a binary risk for the Canadian Dollar, with a tentative deal expected to reduce tariff risk premia and support CAD. A breakdown in talks, however, could trigger a sharp USD/CAD rally amid persistent USMCA policy uncertainty.
A reported deal would lower steel and aluminum tariffs to 25% and auto tariffs to 15%, cutting policy-implied tariff rates by 1.5% and boosting GDP by 0.1-0.2pp by late 2027. The Bank of Canada is likely to remain cautious, awaiting November data on tariff impacts before considering rate moves.
Recent USD/CAD movements reflect broader USD trends, including softer US economic data and reduced Fed hike expectations. Resilient Canadian data and tariff-related headlines have added volatility but not sustained direction.