07:20 AM EST, 02/07/2025 (MT Newswires) -- The focal point of late has undoubtedly been United States President Donald Trump's proposed tariffs on Canadian goods shipped to the U.S., said UBS.

A 25% universal tariff rate would be troublesome for the Canadian economy -- despite the exemption for energy products, wrote the bank in a note to clients. But it would also have a notable stagflationary effect on the U.S. -- making it an expensive strategy for Trump.

Further, Canada laid out its retaliation strategy which is designed to respond in kind. UBS still thinks the tariffs won't be implemented in that form and "deal making" will remain key in the Trump administration's strategy.

Canada remains in a weak negotiation spot politically without a functioning government in place and new elections likely later in Q2, stated the bank.

In addition, the economy is hurting given its high interest-rate sensitivity and elevated Bank of Canada (BoC) policy rates for some time.

Accordingly, the BoC struck a cautious tone in their policy meeting last week and noted its readiness to react to any economic shock concerning U.S. tariffs.

This would be much needed given fiscal stimulus is unlikely to come to the rescue given parliament remains prorogued until March, pointed out the bank.

The market reaction to Trump's proposed tariffs was rather benign and was completely reversed following the delay in implementation. From here, UBS doesn't see much of a risk premium priced into USDCAD and, rather, the pair trades below what rates differentials suggest.

While the bank doesn't expect the tariffs to be implemented in the mentioned form, a risk of some adverse trade action remains. UBS thinks USDCAD can test 1.46 again in the coming months before edging lower later in the year.

Broader US dollar (USD) strength might also be enough to get there -- even in the absence of tariffs on Canada, according to the bank.