Synopsis:

Barclays highlights the severe vulnerability of the Canadian economy to potential US tariffs, projecting a 19% CAD depreciation and USD/CAD reaching 1.63 if 25% tariffs are imposed on all Canadian imports.

Key Points:

1. Canada's Vulnerability to US Tariffs:

   • 75% of Canadian exports are sent to the US, compared to only 17% of US exports heading to Canada.
   • Exports generate ~27% of Canadian GDP, significantly higher than the US's ~7.5%.

2. Limited Leverage and Retaliation Risks:

   • Canada's reliance on the US leaves it with limited political and economic leverage.
   • Retaliatory tariffs would add to pressure on an already weak economic backdrop.

3. Fiscal Constraints:

   • Unlike the US, Canada has limited fiscal flexibility to counteract the economic damage from tariffs.

4. Model Projections:

   • Barclays' import substitution model suggests a 19% depreciation in the CAD under 25% tariffs.
   • This would push USD/CAD to 1.63, factoring in the depreciation already experienced.

5. Additional Drivers of CAD Weakness:

   • While tariff risks have contributed to recent CAD depreciation, other factors have also played a role, amplifying downside pressures.

Conclusion:

Barclays underscores the disproportionate impact of potential US tariffs on Canada, with limited options for mitigation. The forecast of USD/CAD at 1.63 reflects the severe economic implications of such policies under Trump’s administration.