The Bank of Canada's annual financial stability report said the local financial system is resilient, but U.S. tariffs on Canada and Canada's retaliation could undermine financial stability, especially if the situation persists for a long time.

The report pointed out that a protracted trade war poses the greatest threat to Canada's economy and increases the risk of financial stability. The uncertainty of US trade policy may lead to further market volatility and liquidity pressure in the short term. In extreme cases, market volatility may evolve into market failure.

The ongoing global trade war will also have serious economic consequences in the medium and long term. The central bank also cited hedge funds' growing exposure to Canadian government bonds.

Even buying nearly half of the Canadian government bond auctions. But most of its purchases are financed by borrowing, making it more likely to exit the market under market pressure, threatening the stability of Canada's bond market.