CAD's Bearish Outlook: Trade Wars, Weakening Data, and the Case for a Short Position

The Canadian Dollar (CAD) faces a perfect storm of external pressures and domestic vulnerabilities, setting the stage for further depreciation. A combination of escalating U.S.-Canada trade tensions, weakening economic fundamentals, and softening oil prices has created a high-risk environment for the currency. Investors should prepare for a prolonged period of CAD weakness, with strategic hedging and short positions advisable to mitigate exposure.

Trade Tensions: A Catalyst for CAD's Decline

The U.S. has intensified its protectionist stance toward Canada, with tariffs now a central feature of bilateral relations. Recent developments include:
- Steel and Aluminum Tariffs: U.S. tariffs on Canadian steel and aluminum were hiked to 50% in June 2025, reversing earlier exemptions under the USMCA. This move disrupts supply chains and adds to Canadian exporters' costs.
- Automotive Sector Hit: A 25% tariff on non-U.S. content in Canadian-made vehicles (effective April 2025) has raised production costs, with retaliation from Canada's $30 billion in tariffs on U.S. goods.
- Geopolitical Risks: The U.S. has weaponized tariffs to address non-trade issues, such as immigration and drug-trafficking disputes, undermining the USMCA's stability. With a July 2026 review of the agreement looming, further policy shifts are likely.

The CAD has already lost 8% against the U.S. dollar since June 2024, with the June 2025 tariff hikes accelerating its decline. Analysts at RBC and TD Economics project further depreciation, citing trade uncertainties and BoC rate-cut expectations.

Weakening Economic Fundamentals

Canada's economic data paints a bleak picture, amplifying CAD's vulnerability:
- GDP Growth Slump: Q1 2025 GDP grew only 2.2%, driven by export activity and inventory accumulation. Final domestic demand—a better gauge of underlying strength—remains stagnant, with consumption and housing sectors contracting.
- Labor Market Deterioration: Unemployment has risen to 6.9%, the highest since 2021, signaling a weakening labor market.
- Inflation Divergence: While headline inflation dropped to 1.7% due to the removal of a federal carbon tax, core inflation rose to 2.3%, driven by tariff-induced price pressures. This complicates the BoC's mandate to balance growth and price stability.

Oil prices—a key driver of Canada's economy—have fallen by 15% since mid-2024, reducing export revenues and exacerbating the CAD's trade deficit. With energy exports accounting for 20% of Canada's GDP, further declines could worsen the outlook.

BoC Policy: Trapped Between Tariffs and Rate Cuts

The Bank of Canada (BoC) faces a delicate balancing act. While it held rates steady at 2.75% in June 2025, market expectations for cuts are mounting:
- Market Sentiment: Analysts predict two rate cuts by year-end, reducing the terminal rate to 2.25%. Bond markets, however, assign only a 25% chance of a June cut, reflecting skepticism about the BoC's ability to navigate trade risks.
- Policy Dilemma: Lower rates could weaken CAD further, but the BoC must also combat core inflation and stabilize financial markets.

The yield curve for CAD-denominated bonds has steepened, pricing in rate cuts while signaling economic pessimism. This dynamic creates a negative feedback loop: weaker CAD → higher import costs → inflationary pressures → constrained BoC policy.

Investment Strategies for CAD Exposure

Investors should adopt a defensive stance to capitalize on CAD's decline and mitigate risks:
1. Short CAD/USD Positions: Use futures or inverse ETFs (e.g., FXC) to profit from CAD depreciation. A year-end target of 0.72 USD/CAD (from June 2025's 0.74) is reasonable.
2. Hedging Tools: Businesses exposed to CAD should use currency forwards or options to lock in exchange rates. The BoC's uncertain path makes hedging critical for export firms.
3. USD Asset Allocation: Shift cash into U.S. Treasuries or dividend-paying equities (e.g., SPY) to hedge against CAD volatility and benefit from USD strength.

Conclusion: CAD's Bearish Cycle Unfolds

The confluence of trade wars, weakening economic data, and soft oil prices has set CAD on a downward trajectory. Even if U.S.-Canada trade tensions ease, structural imbalances—such as Canada's reliance on energy exports and U.S. protectionism—will keep pressure on the currency. Investors ignoring CAD's risks may face significant losses. A short CAD/USD stance, paired with hedging, remains the prudent strategy until clarity emerges on trade policy and BoC rate decisions.

Stay vigilant—the CAD's decline is not just a short-term blip but a symptom of deeper, unresolved challenges.