Canadian Dollar's Vulnerability Amid Elevated Trade Uncertainty and Policy Divergence

The Canadian Dollar (CAD) has long been a barometer of North American economic health, but recent trade tensions and policy shifts have thrown its stability into question. With a widening trade deficit, escalating tariffs, and geopolitical uncertainties clouding the USMCA framework, investors must reassess their exposure to CAD. This article explores how these factors create a precarious environment for the currency and offers strategies for navigating the volatility.

Trade Deficits and Structural Imbalances

Canada's reliance on U.S. trade has created a persistent imbalance. In 2023, the U.S. ran a $64.3 billion trade deficit with Canada, largely due to energy imports like crude oil and natural gas. By 2024, the deficit narrowed slightly to $63.3 billion, but the first half of 2025 has seen worsening figures, with June's deficit hitting -$4.46 billion. This trend reflects deeper structural vulnerabilities: Canada's economy remains overly dependent on energy exports, which are volatile and susceptible to global demand shifts.

The widening deficit and trade volatility have already pressured CAD. Energy-related tariffs imposed by the U.S. in March 2025—such as 10% duties on Canadian critical minerals—have further strained bilateral trade flows, reducing Canadian export competitiveness and amplifying the imbalance.

Trade Policy Uncertainty: USMCA and Beyond

The U.S.-Mexico-Canada Agreement (USMCA) was designed to stabilize North American trade, but recent U.S. actions threaten its integrity. In 2025, the U.S. unilaterally imposed 25% tariffs on Canadian steel, aluminum, and consumer goods, citing immigration and drug-trafficking disputes—issues outside USMCA's scope. Canada retaliated with its own tariffs, creating a cycle of retaliation that risks derailing supply chains.

The July 2026 USMCA performance review could bring clarity, but negotiations may intensify existing tensions. Proposals to tie trade terms to labor standards, immigration cooperation, or bilateral trade balances could further destabilize CAD. For instance, if the U.S. demands Canada reduce its trade surplus via protectionist measures, Canadian exporters could face new constraints, weakening economic growth and the currency.

Policy Divergence and Geopolitical Risks

The U.S. under President Trump has pursued a protectionist agenda, imposing tariffs on Canadian goods unrelated to trade terms. These actions, targeting sectors like automotive and agriculture, have raised costs for U.S. consumers and Canadian exporters alike. Meanwhile, Canada's approach—focused on maintaining open trade—contrasts sharply with U.S. unilateralism, creating friction.

Geopolitical risks amplify the uncertainty. U.S. tariffs on Canadian goods linked to fentanyl and immigration issues could expand, while Canada's energy exports face new barriers. This divergence has already spurred Canadian companies to diversify trade partners, potentially reducing CAD's role in global transactions.

Strategic Currency Positioning: Mitigating CAD Exposure

Investors should position defensively amid these risks. Here's how:

1. Short CAD Exposure: Consider selling CAD against the U.S. dollar. A short position in CAD/USD pairs (e.g., using futures or ETFs like the ProShares UltraShort Yen (YCS), though CAD-specific ETFs like FXC are more direct) could profit from CAD's decline.

2. Hedge Trade-Exposed Portfolios: Businesses reliant on North American trade should use currency forwards or options to lock in exchange rates, protecting against further CAD depreciation.

3. Monitor USMCA Negotiations: Track the July 2026 review closely. If the U.S. pushes for stricter trade terms or bilateral surpluses, CAD could weaken further. Conversely, a compromise might stabilize the currency.

4. Diversify into USD Assets: Allocate capital to U.S. Treasury bills or blue-chip equities, which offer stability amid CAD volatility.

Conclusion

The Canadian Dollar faces significant headwinds from widening trade deficits, U.S. protectionism, and uncertain USMCA renegotiations. Investors must treat CAD as a high-risk currency and adopt defensive strategies. By shorting CAD, hedging exposures, and diversifying portfolios, they can navigate the volatility—and even profit from it—as macroeconomic pressures reshape North American trade dynamics.

Stay informed, stay cautious, and position for a CAD that may continue to weaken in this uncertain landscape.