USD/CAD Outlook: Trade Dispute, BoC and NFP Could Put Pressure on the Loonie

The USD/CAD is entering September with several competing forces pulling the currency pair in different directions. 

USD/CAD Daily Chart - Source: ActivTrader

The escalating US-Canada trade dispute is threatening Canadian growth, while the war between the United States and Iran is keeping energy prices elevated and adding to inflationary pressures. At the same time, the Bank of Canada has little room for complacency, having kept interest rates unchanged as it weighs weaker growth against renewed price pressures.

For the US dollar, attention is now turning towards the August Non-Farm Payrolls (NFP) report on Friday. After a series of softer labour-market signals, including weak private-sector hiring and a decline in US job creation in July, the report could significantly influence expectations for Federal Reserve policy.

This creates a complicated backdrop for the USD/CAD, with the direction of the pair likely to depend on whether investors ultimately focus more heavily on Canada's deteriorating trade outlook, the relative strength of the US economy or the contrasting inflation risks facing both central banks.

US-Canada trade war raises risks for the Canadian economy

Trade tensions between the United States and Canada have intensified significantly since Donald Trump returned to the White House. 

Washington has imposed tariffs on several major Canadian sectors, including steel, aluminium, lumber and automobiles, while the latest escalation has introduced a 50% tariff on around C$28 billion of Canadian goods. Canada has responded with its own retaliatory measures. Ottawa announced that tariffs on approximately C$28 billion of US imports would take effect on September 8, adopting what Prime Minister Mark Carney described as a "dollar-for-dollar" and strategic response.

The economic implications could become increasingly visible during the coming quarters. Canada remains highly dependent on the US market, meaning higher trade barriers can affect exports, corporate investment, employment and business confidence simultaneously.

According to RBC Economics, Canada's effective US tariff rate had been among the lowest faced by major US trading partners, but new measures have substantially increased the burden. RBC's earlier analysis estimated that the targeted tariffs alone could reduce Canadian GDP, with retaliation potentially adding to the economic drag.

This is particularly important for the Canadian dollar. A weaker economic outlook tends to reduce expectations for domestic interest rates and can therefore undermine the attractiveness of the loonie. If companies postpone investment and hiring because of uncertainty surrounding access to the US market, the resulting slowdown could increase pressure on the BoC to provide additional monetary support.

Yet tariffs are creating an unusual complication: they are negative for growth but potentially positive for inflation.

Inflation complicates the Bank of Canada's response

The Bank of Canada has been caught between these competing forces for much of 2026. The central bank has kept its policy rate at 2.25% again today, judging that monetary policy needs to balance a weak economy against inflation risks. Its July assessment highlighted US trade policy and the Middle East conflict as the two most important risks to the Canadian inflation outlook.

The problem has become more acute because the US-Canada trade dispute coincides with the energy shock generated by the Iran conflict.

Higher tariffs can raise the cost of imported goods and intermediate inputs. Canadian companies facing US tariffs may also attempt to pass some of those higher costs through to customers. Meanwhile, Canadian retaliatory tariffs can increase the price of US goods sold domestically.

The BoC has already warned about the possibility of these effects. In its previous policy assessment, it noted that higher energy prices were pushing headline inflation higher while underlying measures remained considerably more contained. The central bank also stressed that prolonged energy-price increases could eventually generate broader inflationary spillovers.

That distinction is crucial for USD/CAD traders. If inflation remains concentrated in energy and tariff-sensitive goods while economic activity weakens, the BoC could potentially look through some of the temporary price effects and eventually reduce rates to support growth. Such a scenario would generally favour the USD/CAD pair higher.

However, if tariffs and energy prices begin feeding into wages, services and broader consumer prices, the BoC's room to ease would become much more limited. A prolonged period of elevated inflation could even revive expectations of tighter monetary policy, providing support to the Canadian dollar.

Strong second-quarter growth may not be enough

Canada's recent economic data initially offered some reassurance. Real GDP expanded at an annualized 3.3% in the second quarter, significantly stronger than the first quarter and above the pace anticipated by the BoC. The rebound was supported by stronger exports, domestic demand and business activity.

The timing, however, is important. Much of this strength predates the latest 50% US tariffs and Canada's subsequent retaliation. Consequently, analysts and traders may be reluctant to extrapolate the second-quarter performance into the second half of the year.

Indeed, the Canadian economy entered the latest trade escalation from a relatively fragile position. First-quarter GDP was flat, while the labour market had previously shown signs of softness. The BoC itself has warned that the rebound in second-quarter activity may not prove sustainable and that weaker exports could weigh on business investment and hiring.

This creates a potentially bearish fundamental backdrop for the Canadian dollar. If trade barriers remain in place, Canada's export sector could weaken just as businesses become more cautious about investment.

The loonie could therefore face a difficult combination of slower growth, weaker investment and elevated inflation. For the BoC, this would represent a classic stagflationary dilemma.

US inflation, Iran and the NFP equation

The United States faces a different but related challenge. American tariffs can also increase consumer prices, while the Iran conflict has added another source of inflation through energy markets. Higher oil prices can feed directly into gasoline prices and indirectly increase transportation and production costs across the economy.

At the same time, there are growing signs that the US labour market is losing momentum. The latest JOLTS report showed job openings increasing slightly to 7.3 million in July, but the hiring rate fell to 3.2% from 3.4% in June, reinforcing the picture of a labour market characterised by relatively limited hiring activity.

The August ADP report added to those concerns. Private-sector employment increased by only 38,000 jobs, below expectations for roughly 47,000-48,000 and marking the weakest increase since January. Education and healthcare accounted for most of the gains, while manufacturing and professional and business services shed jobs.

The official NFP report, due on September 4, will therefore be particularly important. The consensus is for around 53,000 new jobs, with the unemployment rate expected to remain near 4.1%.

A significantly weaker-than-expected NFP could reinforce expectations that the Federal Reserve will need to ease policy, putting downward pressure on US Treasury yields and potentially weighing on the dollar. This could provide the USD/CAD with a catalyst for a move lower, particularly if Canadian data remains relatively resilient.

Conversely, a stronger employment report could revive expectations that the Fed needs to maintain restrictive policy for longer. This would be especially significant if wage growth remains firm and inflation continues to be supported by tariffs and higher energy prices.

In that scenario, the US dollar could strengthen against the Canadian dollar as the interest-rate differential moves in its favour.

What to expect from the USD/CAD?

The outlook for the USD/CAD is therefore increasingly dependent on which shock dominates: Canada's trade exposure, the US labour-market slowdown or the inflationary consequences of tariffs and the Iran conflict.

For the Canadian dollar, the biggest risk is that the US trade dispute generates a meaningful slowdown in exports, investment and employment while retaliatory tariffs simultaneously lift domestic prices. That combination would make it difficult for the BoC to support the economy aggressively without risking a renewed inflation problem.

For the US dollar, meanwhile, the key vulnerability is the labour market. If the NFP confirms that hiring has deteriorated significantly, markets could increasingly price a more accommodative Fed even if tariffs and energy prices keep inflation elevated.

The result is a highly asymmetric policy environment in which neither central bank has an easy solution. For the USD/CAD traders, the NFP will therefore be more than another US economic release: it could help determine whether the next major move in the pair is driven by widening US-Canadian rate expectations or by the growing economic cost of the North American trade war.

Sources: Bank of Canada, Statistics Canada, U.S. Bureau of Labor Statistics, ADP, The Wall Street Journal, Reuters, ABC News, The Guardian, Yahoo Finance

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