The Canadian dollar has strengthened following Trump’s tariff announcement, as it was confirmed that Canada and Mexico are exempt from the 10% baseline, allowing USMCA-compliant goods to enter the US tariff-free. This exemption positively impacts a substantial portion of imports into the US.
The USD/CAD exchange rate fell to 1.4223, marking its lowest level since February 24. Canada and Mexico currently face a 25% tariff on fentanyl, but this does not affect USMCA-compliant goods.
North American Trade Bloc Potential
Additionally, there is a 25% tariff on finished automobiles, while parts are exempt until early May, suggesting potential room for negotiation between the countries. Further discussions may follow, as indicated by White House economic advisor Kevin Hassett regarding a North American trade bloc. Canadian Prime Minister is expected to provide a response soon.
The initial section highlights the Canadian dollar’s rise on the back of a temporary edge granted by U.S. tariff exclusions. With Canada and Mexico spared from a 10% blanket tariff for goods that follow the criteria of the USMCA agreement, cross-border trade—particularly in manufactured goods—gains a valuable cushion. This exemption has a direct and measurable effect. When the announcement was made, the USD/CAD rate dropped below 1.4230, which marked its weakest point for the greenback in almost two weeks. Essentially, this means that at current momentum, one US dollar now exchanges for fewer Canadian cents, which reflects strengthened sentiment around the Canadian economy—at least in the short term.
Despite the relief on standard goods, Washington has imposed harsher levies on specific sectors—fentanyl being one example—with a 25% tariff in play. These penalties don’t target compliant trade but can still distort flow in neighbouring categories or raise costs in peripheral industries. Also worth noting: while finished cars from foreign sources are penalised at that same rate, car parts have received a short-term reprieve, up until early May. That expiry date carries weight, as it implies a window of pressure. This could be used to strike new terms, tighten regional supply chains or push for shifts in domestic production patterns before imported components get taxed as well.
Hassett hinted at something bigger—a shape-up of trade cooperation across the three long-standing partners. If more integrated measures are on the table, this would expand the scope for upcoming policy adjustments. Market participants should take that signal for exactly what it is: a warning that the current rules on exemptions and tariffs are provisional at best and may hinge on ongoing diplomatic manoeuvring.
Tariff Uncertainty And Market Impact
Traders with exposure to derivative products tied to CAD pairs or auto-related inputs now face a situation shaped more by political messages than purely economic indicators. With official remarks from Ottawa expected any moment, volatility may be spurred not by concrete action but by tone, phrasing, or whether the Prime Minister leans towards conciliation or contest.
In periods like this, medium-term bets carry additional risk unless hedged adequately. Activity should be dissected across expiry dates, especially around early May, when the tariff status for imported parts is due to change. Keeping positions too leveraged or too far out could expose portfolios to sudden swings. If liquidity tightens around policy comments or if US trade reps alter language on exemptions, price gaps and slippage might hit more than just headline pairs.
We pay attention also to any signs that the North American bloc could formalise broader trade commitments. Should that develop, spreads across North American sovereigns might narrow, and currency volatility could dip. Until then, we stay measured. Spot and futures traders alike should lean into instruments that offer flexibility and avoid over-exposure linked to assumptions about policy consistency.
Tariff timing matters more than headline percentages. So if early May approaches without clarity, or if Ottawa’s statement triggers new expectations, implied volatility might spike. Call spreads or collar structures could be preferable under those circumstances, offering constrained downside with potential for controlled upside if CAD strength persists. The same holds for options on automotive exports, particularly where parts enter assembly lines under complex sourcing arrangements.
We should not assume that just because Canada and Mexico received exemptions now, this stands as precedent for later disputes. Recent moves have shown that exemptions are often temporary, with politics playing a direct role in trade friction.
