Trade Uncertainty Clouds Canadian Dollar's Outlook After August Gains, MUFG Says

11:35 AM EDT, 09/01/2026 (MT Newswires) -- The Canadian dollar strengthened further against the US dollar in August, although the rally lost momentum toward month end as US-Canada trade negotiations broke down, according to MUFG in a Tuesday note. The USD/CAD fell from 1.4026 to 1.3897 at the London close in August. The Canadian dollar's earlier gains were driven by optimism that a trade deal between the two countries was close, leaving the currency exposed to further downside if negotiations fail to show a clear path toward resolution in the coming weeks, wrote the bank in the note. A 50% US tariff on $20 billion of Canadian imports is now in effect, with Canada retaliating on a "dollar for dollar" basis. The initial foreign exchange impact has been limited given the tariffs' narrow scope, but further US measures remain a risk, including a planned increase in auto tariffs to 50% from the start of 2027, although the timeframe leaves room for further negotiations, added MUFG. Financial markets generally expect the dispute to remain contained rather than lead to a significant escalation in tariffs, said the bank. However, a prolonged breakdown in trade would weigh on both economies, with Canada likely to bear the greater impact. "Aside from this key uncertainty, the direction of crude oil and monetary policy will be key" for the Canadian dollar, wrote MUFG in the note. With inflation subdued, the Bank of Canada has room to delay rate hikes, with markets not pricing a full hike until next March. If the Fed remains on hold and the US-Canada trade dispute is eventually resolved, USD/CAD is likely to stay range-bound, with a weaker US dollar outlook leaving some room for further downside, according to MUFG.