A few hours ago, the US President published a letter to Canada to inform them of the introduction of 35% tariffs from 1 August. As usual, he justified this by citing the large quantities of fentanyl allegedly entering the US from Canada. Added to this was the fact that Canada had reacted to earlier tariffs, which Trump does not usually tolerate, Commerzbank's FX analyst Michael Pfister notes.

Multi-month downward trend in USD/CAD may stop

"Following the announcement, the Canadian dollar understandably depreciated significantly. It only recovered somewhat after reports emerged that USMCA-compliant goods would be exempt from the higher tariffs. However, as is often the case, this remains unclear. We have not yet heard anything from Trump regarding this matter, and reports suggest that a final decision has yet to be made."

"As we warned long ago, CAD traders should not be too confident that Donald Trump will leave his northern neighbours alone now. Although the downward trend in USD/CAD over several months was mainly due to the weakness of the USD, we repeatedly emphasised that this would not necessarily continue indefinitely, given the weak state of the Canadian economy."

"While the announcement came as a surprise, it confirms our view. We will now have to wait and see what Trump's final decision on USMCA-compliant goods will be, but the Canadian dollar is likely to face a turbulent few weeks ahead."