Synopsis:

HSBC highlights the potential severe impact on CAD if President Trump imposes 25% tariffs on Canada this Saturday. The BoC’s analysis suggests this could drag GDP into contraction and trigger a sharp CAD depreciation, with potential FX intervention from the BoC if market dysfunction arises.

Key Points:

1. BoC’s GDP & CAD Impact Forecasts:

   • A 25% tariff could cut 2025 GDP growth from +1.8% to -0.7% YoY.
   • 2026 GDP growth could drop to just 0.3%.
   • In 2019, the BoC estimated such tariffs could cause a 25% drop in CAD (though it didn’t specify this time).

2. Implications for CAD & BoC Policy:

   • Governor Macklem did not rule out FX intervention if the CAD weakens excessively.
   • Tariff-induced recession could drag the policy rate back to 0.25%, the level seen during COVID-19.
   • A resulting spike in US-Canada yield differentials could push USD/CAD sharply higher.

3. Other Considerations:

   • Pass-through effects on inflation and the Canadian government’s policy response remain uncertain.
   • Potential Fed reaction and feedback loop effects could influence the final CAD trajectory.

Conclusion:

A 25% tariff would be a major shock for CAD, likely triggering a sharp depreciation and a policy response from the BoC. While market dysfunction could bring FX intervention into play, USD/CAD would still have significant upside potential in the near term.