The Canadian dollar opens weaker at C$1.384 per US dollar, extending its decline since trade talks broke down late Friday, according to BMO Capital Markets economists in a Monday note.
Without a last-minute deal to avert the new Section 338 tariffs, additional duties on certain US imports from Canada have now officially taken effect since Saturday. The measures mark a renewed escalation in US tariff threats, with Canada and its currency specifically in the crosshairs, said economists and analysts.
The Canadian dollar "is the clear underperformer in G10 so far today," wrote Derek Halpenny, Head of Research Global Markets for EMEA at MUFG, in a Monday note.
US-Canada trade talks collapsed late Friday ahead of President Donald Trump's 50% tariffs on roughly C$28 billion of Canadian goods. Prime Minister Mark Carney said Canada suspended negotiations over "last-minute changes" that were unfair and uneconomic, and vowed dollar-for-dollar retaliation and new support for Canadian workers.
The US blamed Canada for the failure in the talks.
The tariffs are unlikely to derail Canada's growth, affecting goods equivalent to about 0.4% of gross domestic product and jobs, while more than 80% of exports remain duty-free under the US-Mexico-Canada Agreement on trade, or USMCA, according to RBC Economics in a Saturday note. Still, the measures mark a renewed escalation of US tariff pressure on Canada.
"The [Canadian] economy will suffer concentrated pain," wrote Karl Schamotta, Corpay chief market strategist, in a Saturday note, adding he expected the Canadian dollar to start the week lower.
The downside is that the tariff dispute between the two countries may not be over, according to economists. The Trump administration could retaliate against Canada's counter-tariffs, putting more Canadian exports at risk. More broadly, an escalating trade war could weigh on business sentiment.
The medium-term outlook for the Canadian dollar will hinge on whether the dispute escalates and investors begin pricing in greater economic damage. Canada's pledge to retaliate dollar-for-dollar increases the risk of a damaging tariff spiral.
The Canadian dollar was understandably weaker in early trading this week as markets reversed recently built-up optimism over a trade deal, added MUFG. The currency had been the third-best-performing G10 currency in August, supported by higher crude prices and expectations of a deal.
The coming months could bring a familiar pattern of no apparent progress in the dispute between the two countries, with Canadian sentiment indicators likely to weaken again and reverse the recent tentative recovery, hitting the loonie.
The Canadian dollar downside risks will intensify the longer there is no resolution to this escalating trade war, added MUFG.