It's official, CIBC said it now has the size and scope of United States tariffs on Canada and counter-tariffs over the weekend's announcement.

The impact on the Canadian economy is "highly negative," though the most important question that remains is around the ultimate duration of these new trade policies, noted the bank. Depending on the persistence of the announced measures, investors are still facing very different economic outcomes that argue for very different responses from the Bank of Canada.

Canadian liquidity is ample and complimented by recent actions from the BoC, stated CIBC. Other BoC liquidity facilities will be 'ready to go' in the event of a more deleterious funding outcome.

Should bond market functioning become impaired, the bank would further expect the BoC to expand its balance sheet for a temporary period of time. For the OIS meeting gaps, CIBC looks for inter-meeting BoC cuts and non-standard-sized reductions to become priced, steepening the very short end.

Another key consequence of tariffs, even if temporary, is a vacuum of US dollar's (USD) coming into, and out of, the Canadian banking system, pointed out the bank. The overall level of hedging from the non-financial sector will also adjust lower. This should manifest itself in a steeper cross-currency curve, especially if Western Canada Select (WCS) cheapens materially from here.

The Canadian dollar (CAD or loonie) bills also remain very attractive assets on a SOFR-equivalent basis for U.S. investors.

Bond yields will fall across the term structure in each tariff scenario but at different speeds, added CIBC. 2s5s should bull-flatten on a permanent tariff scenario and steepen on a temporary one. In contrast, 5s10s and 10s30s are expected to steepen under all outcomes. Given a deteriorating external growth backdrop, CIBC looks for more 'growth concerns' to dominate 10- and 30-year U.S. Treasury pricing.

Resultantly, CAD steepeners versus U.S. flatteners make sense, according to the bank. The cross-market impact is more obvious in 2s and 5s, though slightly ambiguous for the long end. Issuance risks will help rebuild back-end term premiums, especially given the preference for locking-in fiscal stimulus in the long-dates.

Currently, CIBC believes that the tariff premium embedded into spot is worth roughly 4%. Risk reversals suggest that the trade war is expected to last six months. Based on CIBC Economics' updated tariff scenario, USD/CAD peaks at 1.50 sometime between now and the middle of the year.

If the tariffs are removed within six months, the bank could see a slow decay in USD/CAD, gradually reaching 1.36-1.37 by the end of 2027. Should the tariff be permanent, USD/CAD remains in the high 1.40s for the coming years -- absent a new major catalyst.