Markets may be underpricing CUSMA risk for institutional investors, experts warn
The CUSMA review is underway this week and the range of possible outcomes stretches wide enough to make any institutional investor uneasy.
While world leaders of the US, Mexico and Canada had until July 1 to come to an agreement, it’s almost certain that negotiations will be extending far into the future.
Kathy Tausz, vice president of fixed income at Beutel Goodman, believes the agreement's review has been overshadowed by competing global crises.
"It almost feels like the CUSMA negotiations are taking a bit of a back seat to all the other headlines, such as the Middle Eastern conflict," she said. "I feel like the market's underpricing the uncertainty right now and ignoring that headline risk, if you will. It’s not to say that we're negative on the outcome. I just don't think that there's a lot of attention paid right now to the CUSMA negotiations. Obviously, for Canada, it has big implications and carries a meaningful macro risk.”
That assessment is shared by Doug Porter, managing director and chief economist at BMO, who noted in a recent BMO webinar that capital markets moved on from the trade file months ago.
"Around the middle part of 2025, equity markets lost interest, and moved on," he said. "It's pretty clear that AI and then the conflict with Iran really took the market's attention."
But if equity investors have looked away, currency and bond markets have not. Porter highlighted that the Canadian dollar against the euro is close to its lowest level in 25 years, and while interest rate differentials explain part of that, trade uncertainty is doing real damage underneath.
"If we don't have certainty in our trade relationship with the US, that's a clear medium to long term negative for the Canadian dollar," he said.
How CUSMA impacts portfolio planning
That matters for plan sponsors and institutional investors trying to figure out how much weight to give this risk. Tausz underscored CUSMA alone isn't enough to justify a strategic asset allocation overhaul but on a risk management level, “it does change their scenario analysis and expectations of how the macroeconomic outlook can play out for Canada," she said, emphasizing the agreement is one variable among many.
Tausz was quick to emphasize that what often gets lost in the tariff headlines is just how much protection CUSMA provides. With the agreement intact, Canada sits near the bottom of the global tariff rate chart - even after the IEEPA tariffs and now the replacement Section 122 tariffs that hit Canadian exports hard. Her team refers to this as "Canada Undercover," a reflection of how the agreement's shelter keeps the country's effective tariff rate far lower than most trading partners.
“If we do get an unfavorable outcome, it could weaken business investment and business sentiment. Investment in general has been weak; it's something that Canada wants to improve over time. But you need to have these trade agreements in place to alleviate some of that uncertainty, so businesses and investors are willing to invest,” she added.
As a fixed income investor, Tausz frames the entire CUSMA question through the lens of what it means for the yield curve, noting the front end is driven by the Bank of Canada's policy rate, and the central bank is watching the uncertainty closely. She underscored how a renewal would go a long way toward lifting that overhang and would be a significant positive for the broader Canadian economy.
When can investors expect a resolution?
She's not bearish on the outcome, but the spread of possibilities is what makes the file so significant for fixed income. At one end, the agreement gets renewed outright on July 1 - something Canada has formally requested but Tausz doesn't expect. On the other, any party could withdraw with six months' notice, tearing the agreement up entirely.
Between those poles sits a wide band of outcomes, and that range alone makes CUSMA a critical variable for bond investors, she said.
Steve Verheul, former chief trade negotiator for Canada, also doesn’t see a resolution coming anytime soon.
"I don't think there's been anything close to a good deal on the table so far," he said in BMO’s recent webinar. “There were discussions last year, and a number of other countries reached an agreement with the US but those agreements are unlikely to stand the test of time over a period because they’re not particularly solid agreements. So I don't think we'll see an outcome in the short term necessarily. I think it's more likely that the discussions will continue beyond the midterms and possibly even into next year. And I think that's the most likely outcome.”
Part of the problem, he suggested, is asymmetric flexibility, particularly as Canada and Mexico have moved on a number of bilateral irritants, while the US has offered little in return. That imbalance gives neither Ottawa nor Mexico City much incentive to rush toward closing.
Tausz’s team is also tracking what the US administration chooses to prioritize once negotiations gain momentum. So far, autos have drawn the most attention, but Tausz notes the administration pushed hard against Canada's digital services tax and could pivot toward border security or defense spending.
For fixed income managers, the sector-level picture is more nuanced than the macro one as Tausz noted that the Canadian bond universe is dominated by domestic-focused issuers – from banks, utilities, telecoms - with minimal trade exposure. But she emphasized that the energy sector is likely to emerge unscathed, given the lack of substitutability for Canadian heavy crude.
Uncertainty remains the name of the game
What Tausz's team is left with, then, are two base cases. In the first, the parties renegotiate and renew, with sectoral winners and losers emerging depending on content rules and tariff treatment. In the second, nobody agrees and the agreement simply rolls into annual reviews, which it can do until 2036.
"We could basically just enter into this prolonged period of uncertainty," she said. "It's not the worst-case scenario for Canada because CUSMA stays in force. We still get the protection from tariffs, but we don't resolve any of the uncertainty."
Still, Verheul emphasized plan sponsors and business leaders shouldn’t lose sight of the baseline as 85 per cent of Canadian exports still enter the US duty-free, and that access is unlikely to change. That puts Canada in a stronger position than most countries navigating the current tariff environment.
The trouble spots are concentrated in manufacturing — steel, aluminum, autos, and a handful of other products where US tariffs continue to bite. While Verheul expects those pressures to ease over time, in part because the tariffs are hurting American businesses and consumers too, he also didn’t promise a smooth path.
"I think we'll likely see some kind of adjustment over time, but it may be a bumpy road until we get there and it's going to take a while, I think," he said. "Continued uncertainty is going to be the name of the game going forward."
