Rising Trade Tensions and the Bearish Outlook for USD/CAD

The global economic landscape in 2025 is defined by escalating trade tensions between the United States and China, a conflict that has reverberated through commodity markets and currency dynamics. For the USD/CAD pair, the implications are particularly acute. As a commodity-linked currency, the Canadian dollar (CAD) is inextricably tied to the fortunes of oil and agricultural exports, both of which are now under pressure from the U.S.-China trade war. This analysis explores how geopolitical risks and commodity price volatility are shaping a bearish outlook for USD/CAD, supported by quantitative insights into Canada's economic vulnerabilities.

Commodity Price Volatility and CAD's Fragility

The U.S.-China trade war has disrupted global supply chains, creating uncertainty that directly impacts commodity prices. Tariffs on semiconductors, rare earth materials, and agricultural goods have driven up costs and distorted trade flows. For Canada, a major exporter of oil and agricultural products, these dynamics are doubly problematic.

Oil prices, a critical determinant of CAD strength, have faced downward pressure due to oversupply concerns and reduced demand from China, the world's largest energy importer. According to a Reuters report, West Texas Intermediate (WTI) prices have fallen below $57 per barrel, nearing a five-month low, as trade tensions and OPEC+ production adjustments cloud market sentiment. This decline undermines Canada's energy sector, which accounts for a significant share of its export revenue. Meanwhile, U.S. soybean prices remain uncompetitive in China due to lingering tariffs, pushing buyers toward cheaper alternatives like Brazilian soybeans, a Yahoo Finance report notes. These developments highlight how trade policies are eroding the value proposition of Canadian commodities, indirectly weakening the CAD.

Geopolitical Risks and CAD/USD Dynamics

The CAD's vulnerability is further amplified by the geopolitical risks inherent in the U.S.-China conflict. The Bank of Canada's Staff Analytical Note 2024-20 underscores that systematic risk factors-such as oil price fluctuations and cross-border interest rate differentials-account for up to 80% of exchange rate variation in the Canadian dollar. However, the explanatory power of these factors has waned since 2022, as idiosyncratic risks, including trade tensions, have gained prominence.

Recent escalations under the Trump administration, including tariffs on Canadian imports and demands for increased NATO defense spending, have heightened economic uncertainty, a WFMZ report notes. Economists estimate that tariffs affecting 25% of Canadian exports could reduce annual GDP growth by 0.8–1.2 percentage points, potentially leading to a 3–5% depreciation of the CAD against the USD, as VT Markets forecasts. While temporary truces, such as the October 2025 agreement between U.S. and Chinese leaders, have provided short-term relief, the fluidity of negotiations ensures persistent volatility.

Quantitative Analysis: GDP, Exports, and CAD's Trajectory

Quantitative data reinforces the bearish outlook. Canada's 2025 federal budget allocates C$280 billion over five years to infrastructure and housing, aiming to stimulate growth, as Morningstar notes. However, this fiscal stimulus faces headwinds from weak global demand and the Federal Reserve's anticipated rate cuts. The CAD's performance is also constrained by inflation concerns and weaker-than-expected economic data, which could delay the Bank of Canada's rate hikes, as FXStreet previously reported.

A key risk lies in the potential for U.S. tariffs to disrupt Canadian exports. With 25% of Canada's exports exposed to U.S. trade restrictions, a 0.8–1.2 percentage point drag on GDP growth is plausible, as VT Markets forecasts. This would exacerbate the CAD's depreciation, particularly if oil prices remain depressed. For investors, the interplay between commodity prices, trade policy, and monetary policy creates a high-risk environment for CAD bulls.

Conclusion: A Bearish Outlook Amid Uncertainty

The USD/CAD pair is poised for further weakness in the near term, driven by the confluence of U.S.-China trade tensions, falling oil prices, and Canada's export vulnerabilities. While temporary trade truces offer hope for stabilization, the underlying geopolitical and economic risks remain unresolved. For investors, hedging against CAD depreciation and capitalizing on USD strength appears prudent. As the world navigates this turbulent period, the CAD's fate will remain closely tied to the volatile interplay of commodities and geopolitics.