Above: Trudeau announces 25% tariffs on a selection of U.S. imports as a North American trade war gets underway.
The Canadian Dollar can rally if the U.S. softens its stance on import tariffs later today.
The Canadian dollar sank to its weakest since 2003 against the Dollar and is near 2024 lows against the British Pound following confirmation the U.S. would proceed with a 25% import tariff on Canadian goods.
Canadian Prime Minister Justin Trudeau reciprocated with a tariff on C$155BN worth of U.S. imports, thereby kicking off a trade war in North America.
Trump said he would hold separate calls on Monday morning with Trudeau, as well as with the Mexican leadership. The levies are set to take effect on Tuesday, barring a last-minute deal.
The hope of a last-minute deal will limit CAD weakness on Monday. Any breakthrough would see CAD rally back in a relatively determined fashion.
However, the chances of Trump pulling back look slim. "I don’t expect anything very dramatic," Trump said of the planned calls. "We put tariffs on. They owe us a lot of money, and I’m sure they’re going to pay."
"Markets are hopeful that a last-minute deal can still be secured that prevents the tariffs coming into effect," says Daragh Maher, Senior FX Strategist at HSBC. "Alternatively, the market may simply be complacent about the impact of these tariffs and how long they will last for. We suspect complacency is the culprit."
Trump surprised markets in the wake of his November election win by citing Canada as an early target for tariffs.
Many thought Canada would be covered by the NAFTA 2.0 agreement that Trump himself created during his first presidency. However, he made it clear that tariffs would be tied to issues concerning immigration and drugs, as well as trade imbalances.
"Mexico sends tons of fentanyl into our country. Canada has seen a massive increase in fentanyl trafficking across its border. There are three ways of stopping this. The first is ask nicely, which we’ve done. It’s gone nowhere," says Vice President JD Vance.
"Now we’re on to the consequences phase," he adds.
Above: GBPCAD at daily intervals showing the technical ceiling CAD buyers are facing.
Developments GBPCAD rises up towards a technical ceiling at 1.8150, which has invited selling interest in the past and thwarted the achievement of stronger levels for CAD buyers.
Certainly, any softening of the U.S.-Canada trade faceoff would reinforce this level and prompt another pullback to 1.7850 and then lower.
On the upside, a break of 1.8150 would open the door to another retest of the 2024 high at 1.82.
To reach above here we would need clear confirmation that the U.S. is sticking with its hawkish trade stance. HSBC's Maher says the Canadian Dollar is still not fully reflecting the odds of a 25% U.S. tariff hike, and that the adjustment lower has further to run.
"Expectations are that the Bank of Canada’s policy rate will finish the year at 2.19%, basically three cuts from here. If the market truly believed a 25% tariff was here to stay, with Canadian retaliation, and possible US counter-retaliation, then rate expectations and the CAD would be much lower. That reality check may yet come," he says.