The Impact of Canada's Record Current Account Deficit on Export-Driven Sectors and Currency Stability

Canada’s Q2 2025 current account deficit of C$21.16 billion—the largest in history—has exposed vulnerabilities in its export-driven economy and currency stability. This deficit, driven by a record C$19.6 billion goods trade shortfall, reflects the compounding effects of U.S. tariffs, a strong Canadian dollar, and disrupted supply chains [1]. For investors, the crisis underscores the need to reevaluate cross-border trade strategies and adopt robust hedging mechanisms to mitigate CAD exposure.

Export Sectors Under Fire

The automotive, steel, and aluminum industries have borne the brunt of U.S. tariffs, which have eroded Canada’s competitive edge. A 35% tariff on non-USMCA-compliant steel and aluminum imports has forced Canadian manufacturers to seek alternative suppliers, increasing input costs and delaying production [2]. Meanwhile, the automotive sector faces a 50% tariff on Canadian steel under Section 232, compounding challenges for automakers reliant on cross-border supply chains [3]. These tariffs have contributed to a 15.7% year-over-year decline in goods exports to the U.S., with automotive exports falling to levels last seen in late 2022 [4].

The lumber industry, another key export sector, remains locked in a retaliatory tariff standoff. While Canada removed 25% retaliatory tariffs on U.S. goods in September 2025 to ease tensions, U.S. tariffs on Canadian lumber persist, creating uncertainty for forestry firms [1]. This sector’s struggles highlight the fragility of Canada’s trade-dependent industries in a climate of escalating protectionism.

CAD Volatility and Hedging Strategies

The Canadian dollar’s 9% depreciation against the U.S. dollar since 2024 has exacerbated risks for exporters and investors. A weaker CAD raises the cost of U.S. imports and amplifies losses for Canadian firms selling into the U.S. market [2]. To counteract this, investors are increasingly turning to hedging tools such as currency forwards and CAD-hedged ETFs.

For example, the RBC Quant U.S. Dividend Leaders (CAD Hedged) ETF (RUDH) has gained traction by using forward contracts to neutralize CAD/USD fluctuations. This strategy has preserved returns for Canadian investors in U.S. equities, where unhedged portfolios saw gains eroded by currency losses—yielding only 4.4% returns in 2025 compared to 8.6% in U.S. dollars [3]. Similarly, CAD-denominated bonds and futures contracts are being deployed to lock in exchange rates and reduce exposure to short-term volatility [1].

Strategic Positioning for Investors

Investors must balance short-term hedging with long-term diversification. While CAD/USD volatility remains high due to trade tensions and divergent monetary policies, the Bank of Canada’s 2.75% policy rate offers some support for the currency [3]. However, the narrowing interest rate differential with the U.S. suggests CAD strength may materialize over the next 12–18 months, making hedging increasingly attractive [2].

Diversification into non-U.S. markets is another critical strategy. Over 30% of Canadian exporters are now seeking alternative customers outside the U.S., with Ontario’s $200 billion infrastructure plan creating opportunities in domestic construction and engineering [4]. Investors should prioritize sectors with lower U.S. exposure, such as energy (which benefits from USMCA exemptions) and technology, while maintaining a hedged stance on cross-border trade.

Conclusion

Canada’s record current account deficit is a wake-up call for investors to reassess their exposure to export-driven sectors and CAD volatility. While U.S. tariffs and currency depreciation pose immediate risks, strategic hedging and diversification can mitigate these challenges. By leveraging tools like CAD-hedged ETFs, forward contracts, and domestic infrastructure opportunities, investors can navigate the turbulence while positioning for long-term resilience.

Source:
[1] Canada's response to U.S. tariffs on Canadian goods [https://www.canada.ca/en/department-finance/programs/international-trade-finance-policy/canadas-response-us-tariffs.html]
[2] Navigating Currency Volatility: The Strategic Value of RBC ..., [https://www.ainvest.com/news/navigating-currency-volatility-strategic-rbc-quant-dividend-leaders-cad-hedged-etf-rising-rate-environment-2508/]
[3] Currency Crosswinds: How U.S. Dollar Ups and Downs ..., [https://www.eckler.ca/currency-rosswinds-how-us-dollar-ups-and-downs-shape-canadian-investor-returns/]
[4] Canada: Assessing Industry Pressure Points From U.S. Tariffs [https://economics.td.com/ca-tariff-exposed-industries]