Donald Trump has threatened to raise tariffs on Canadian auto and steel products to 50%, a step that would mark a further breach of the USMCA agreement negotiated in his first term. The Canadian dollar is coming under selling pressure and interest rates are falling as traders price in a slower economy and a more dovish Bank of Canada.

“On January First, 2027, Tariffs on all Cars, Trucks, both large and small, Automotive Parts, and Steel, will be increased to 50%,” Trump wrote on social media. “Their ridiculously high tariffs on our Farmers and farm products has made life impossible for these great American Patriots, and has long created a 60 Billion Dollar Deficit between our two Countries. Not sustainable, and NOT ANYMORE!”

The threat follows Canada’s walkout from contentious trade talks on Friday, after which the administration imposed 50% tariffs on a narrow but precisely-targeted set of imports, leading Prime Minister Mark Carney to vow “dollar-for-dollar” counter-tariffs.

Markets are by now familiar with the president’s “escalate to de-escalate” style, meaning the fallout has thus far been somewhat contained—and that it may reverse in the coming hours and days.

But there are signs the impasse could drag on for months. Polls taken before and after the breakdown show Carney enjoying overwhelming public support for taking a hard line with the US administration, with leaders across the political spectrum lining up behind him. Trump commands no such backing at home, and the Canadian prime minister appears to be betting that November’s mid-terms will blunt his tariff drive, opening the way to a mutually beneficial deal.

Time will tell.

For now, the Canadian economy looks set to slow as businesses and households turn cautious once again, leaving the loonie to face persistent headwinds.