While the Canadian dollar has recovered from the four-year lows it hit briefly on Monday night, analysts say President-elect Donald Trump’s tariff threat ushers in a “new era of trade uncertainty” and will further weigh on the loonie.
Trump posted to Truth Social on Monday that one of his first executive orders will be to impose a 25 per cent tariff on all goods imported from Canada and Mexico, sending the loonie to lows not seen since May 2020.
“The president-elect’s broadside comes after a distinct dimming in the Canadian dollar’s prospects,” Corpay chief market strategist Karl Schamotta wrote in a research note.
“Elevated household borrowing costs, cool labour markets, lacklustre consumer spending, soft commodity prices, and weak business investment were already pushing the dollar exchange rate towards a four-year low, and a sustained rise in implied volatility could magnify the damage, putting the $1.43 threshold in scope before year-end.”
The Canadian dollar had already been struggling against the greenback prior to Trump’s post, amid expectations of widening interest rate differentials between the neighbouring countries. The Bank of Canada has cut interest rates four consecutive times since June, with its latest decision being a jumbo-sized 50 basis point reduction, bringing the benchmark rate to 3.75 per cent. Expectations are that the Bank will continue slashing rates through 2025. The Federal Reserve recently cut its benchmark rate by 25 basis points to a new range of 4.5 per cent to 4.75 per cent.
The loonie recovered after hitting the four-year lows and was trading up slightly midday on Wednesday, at $1.4025 per U.S. dollar (CAD=X) or 71.28 U.S. cents (CAD/USD=X). It dropped below 71 cents U.S. following Trump’s post.
Schamotta notes that “investors don’t expect Trump to follow through.”
“Canadian Prime Minister Trudeau has already shown signs of capitulating to Trump’s demands, and the president-elect’s history would suggest that last night’s post simply represented an opening gambit in the negotiation process,” he wrote.
“The Canadian dollar seems poised for modest reversal to the upside once traders assess the situation from a more nuanced perspective.”
Still, the threat is expected to be a headwind for the Canadian dollar.
“The loonie will remain under pressure as long as tariff threats remain front and centre for Canada,” TD economists wrote in a research note released on Wednesday.
“It would not be a surprise for the loonie to push below the 70 U.S. cent threshold if threats become reality, further dampening investment sentiment towards Canada.”