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The Canadian Dollar recovered from multi-year lows after Canada and the U.S. agreed on measures to prevent the imposition of trade tariffs.
Both sides were set to impose tariffs on imports from each other on Tuesday, but Canada agreed to bolster security along its U.S. border, satisfying Trump.
"I am very pleased with this initial outcome, and the Tariffs announced on Saturday will be paused for a 30 day period to see whether or not a final Economic deal with Canada can be structured," said Trump.
The Canadian Dollar recovered from multi-year lows after Mexico earlier in the day agreed to its own interim deal with the U.S., confirming to markets a deal was to be done on Canada. USD/CAD rose to as high as 1.48 early on Monday before sinking 2.50% to close the day at 1.4429.
The Pound to Canadian Dollar exchange rate traded as high as 1.8163 before sliding 1.40% to a low at 1.7911 after the agreement was concerned.
"Canada has agreed to ensure we have a secure Northern Border, and to finally end the deadly scourge of drugs like Fentanyl that have been pouring into our Country, killing hundreds of thousands of Americans, while destroying their families and communities all across our Country," Trump announced on Truth Social.
He said Canada agreed to implement the $1.3BN Border plan and that Prime Minister Trudeau committed to "reinforcing the Border with new choppers, technology and personnel, enhanced coordination with American partners, and increased resources to stop the flow of fentanyl.
Above: USD/CAD and GBP/CAD (bottom).
Trump said the deal would see nearly 10,000 frontline personnel deployed to work on protecting the Border.
"In addition, Canada is making new commitments to appoint a Fentanyl Czar, we will list cartels as terrorists, ensure 24/7 eyes on the Border, launch a Canada-U.S. Joint Strike Force to combat organised crime, fentanyl and money laundering. I have also signed a new intelligence directive on organised crime and fentanyl, and we will be backing it with $200 million," said Trump.
Although the Canadian Dollar has recovered from early Monday lows, the threat of tariffs has not evaporated completely as a new deadline is set for early next month when we hear back on progress in trade deal negotiations.
The Bank of Canada said in its January policy decision that the simple threat of U.S. import tariffs on Canadian goods is weighing on consumer and business confidence and investment intentions.
"This threat has also contributed to the recent depreciation of the currency," says Kit Juckes, an analyst at Société Générale.
Daragh Maher, Senior FX Strategist at HSBC, says his bank has revised lower its year-end forecast for USD-CAD to 1.60 from 1.45 previously.
Four channels are in play, he says:
(i) imposition of tariffs could lead to a decline in Canada’s exports, causing the CAD to adjust lower
(ii) signs of contraction in GDP growth could lead the BoC to cut rates, causing rate differentials to work in USD-CAD's favour
(iii) a large drop in oil prices could cause the CAD to weaken
(iv) markets could hawkishly reprice Fed rate expectations, boosting the USD.
"However, there are many uncertainties that could prove us wrong. For example, a scenario where these tariffs are removed could see USD-CAD drop back towards our previous forecast and, conversely, if tariffs continue to rise in a tit-for-tat fashion, or prove to be more damaging to Canada’s economy, then our forecast may end up being too low," says Maher.