CAD: Starting to take the tariff threat more seriously – ING

USD/CAD rallied yesterday as Trump outlined a tariff schedule that explicitly includes duties on Canada and Mexico from 4 March, ING's FX analyst Chris Turner notes.

Upside risks to USD/CAD today

"The pair is currently embedding around 2% of risk premium, according to our short-term fair value model. That is above the 1.5 standard deviation, but still well below the nearly 4% peak risk premium that was embedded in USD/CAD on 3 February."

"Back then, we published a note to discuss our view on CAD under the assumption that 25% tariffs would go ahead. Most of those considerations stand, and depending on how long tariffs remain in place, a move to 1.50 is a definite possibility. The difference this time is that markets are treating Trump’s tariff threat with more scepticism, refusing to price in the full tariff effect and partly betting on another last minute deal."

"We still see upside risks to USD/CAD today unless there are any reports of a de-escalation. We see 1.45 as the level that would mark a shift to markets pricing in the tariff risk as a base case. If duties are levied on Tuesday, then we’ll look at 1.480 as the key resistance to be tested."