CIBC Capital Markets outlines three possible paths for the Canadian dollar as trade tensions with the US escalate, projecting that even in the most severe case, losses will be contained and the USD/CAD rate will not exceed 1.41
The Canadian dollar is under renewed scrutiny as trade tensions between Canada and the United States intensify, prompting CIBC Capital Markets to publish a detailed scenario analysis for the currency's near-term outlook. According to the bank, the Canadian dollar's depreciation is likely to remain limited, even if the dispute escalates further. CIBC assigns probabilities to three main scenarios, with the most severe-a full tit-for-tat tariff escalation-capped at a USD/CAD exchange rate of 1.41.
Recent developments have heightened uncertainty. Ottawa is preparing to announce countermeasures, with Finance Minister François-Philippe Champagne and several cabinet members expected to reveal Canada's response to new US tariffs. The situation deteriorated after President Donald Trump warned Canadian officials of consequences "far WORSE" than current duties, including the threat of raising tariffs on Canadian vehicles and steel to 50% from January 2027. Prime Minister Mark Carney responded by accusing Washington of seeking to "destroy our major industries" and rejecting any negotiation as a subordinate partner.
Three Scenarios for the Canadian Dollar
CIBC's analysis, led by strategist Sarah Ying, outlines three possible outcomes. The base case, given a 60% probability, assumes the market's attention shifts elsewhere and USD/CAD drifts to 1.37, provided US retaliation against Canada's planned US$20 billion in countermeasures remains moderate. In this scenario, the market is expected to focus on other events, such as the Jackson Hole symposium or upcoming US economic data, rather than the trade dispute itself.
The second scenario, with a 35% probability, envisions a full escalation of tariffs between the two countries. Here, CIBC expects USD/CAD to reach a ceiling of 1.41, but not to repeat the panic-driven spike seen in February 2025, when the pair briefly touched 1.4793 following an initial US tariff threat. Ying notes that the current environment differs from past episodes, as the Federal Reserve is expected to remain patient and avoid further rate hikes this year, reducing the risk of a sharp, sustained move higher in USD/CAD.
The least likely scenario, at 5%, is a rapid resolution of the dispute. If both sides reach a quick settlement, CIBC projects USD/CAD could fall back to the 1.35-1.36 range, restoring the Canadian dollar's recovery narrative and highlighting the divergence between a slowing US economy and a more robust Canadian outlook.
Market Reaction and Economic Impact
As of the latest trading, USD/CAD stands at 1.3859, up from a three-month low of 1.3760 recorded on 21 August. The Pound to Canadian Dollar rate remains near 1.89. CIBC Economics estimates that the current round of tariffs will not significantly affect Canadian GDP in 2026, as many affected industries anticipated the measures and adjusted in advance. The main economic impact is expected to materialize in 2027, with a projected GDP hit of around 0.5%.
Ying argues that the market is reluctant to price in a large tariff premium, viewing the latest measures as politically motivated and likely temporary. She points out that the US was prepared to withdraw tariffs before negotiations broke down, suggesting that a reversal remains possible if talks resume. The mandatory annual USMCA trilateral talks also ensure that both sides will remain in contact, even if formal negotiations are delayed until after the US midterm elections.
For context, similar episodes of currency volatility have occurred in other major pairs when policy expectations diverge. For example, analysts have previously warned that the British pound could weaken further against the US dollar if market expectations for Bank of England rate hikes diverge from official guidance, as discussed in this analysis of sterling's vulnerability.
Temporary Tariffs and Political Calculations
While escalation is now more than a remote risk, CIBC believes the market will not assign a lasting premium to tariffs that are widely seen as temporary or politically driven. Some of the targeted goods, such as hockey sticks, underscore the symbolic nature of the dispute. The bank also notes that both governments have made public commitments, making a near-term climbdown less likely, but not impossible if political incentives shift.
Mandatory USMCA meetings and ongoing diplomatic contact, including statements from Canada's ambassador to the United States, suggest that dialogue will continue, even if the immediate focus is elsewhere. In the meantime, CIBC maintains that US macroeconomic data and Federal Reserve policy will remain the primary drivers of USD/CAD, with trade-related volatility likely to fade if US economic momentum slows and discourages further rate hikes.
Scenario analysis is a common tool for assessing currency risk in periods of heightened uncertainty. By assigning probabilities and clear boundaries to each outcome, institutions like CIBC help market participants and policymakers understand the range of possible moves and the factors that could shift the balance. In this case, the analysis suggests that while the Canadian dollar faces real risks from trade tensions, the likelihood of an uncontrolled depreciation remains low as long as both sides retain incentives to negotiate and the Federal Reserve maintains a steady policy stance.
