File image of Canadian Prime Minister Justin Trudeau. Photo Credit: Patrimonie canadien - Canadian Heritage. Image source and licensing.
The U.S. Dollar and Canadian Dollar were the two biggest losers in G10 FX after Canada and the U.S. entered a trade war.
The Pound-to-Canadian Dollar exchange rate (GBP/CAD) rose to 1.8447, its highest level since Brexit, after Canada's prime minister, Justin Trudeau, said U.S. imports would be tariffed at 25% from Tuesday.
The decision follows U.S. confirmation that it would proceed with a 25% import tariff on Canadian goods and a 10% tariff on Canadian hydrocarbons on Tuesday.
Canada's quick response marks the start of a trade war between the two North American countries.
U.S. stocks and the U.S. Dollar also fell in response to the developments, suggesting markets are pricing in unsavoury outcomes for the U.S. economy.
The Pound rose one per cent against the Dollar on the day to its highest level since December 18 at 1.27. The Euro rose by a similar margin to reach 1.0486.
"This changing reaction of the dollar comes amid an apparent broader shift in market perspectives on tariffs over the past few weeks, with the focus moving from the potential boost to inflation to the negative implications for growth," says Jim Reid, a strategist at Deutsche Bank.
The weaker dollar reflects increased expectations that the Federal Reserve would respond to economic damage caused by the tariffs by cutting interest rates further.
Data shows investors are now pricing 75 basis points of cuts by the December meeting, which implies we are up to three 25bp cuts from just one at the start of February.
In the stock markets, U.S. equities slumped 1.37% on the day, with the NASDAQ and Dow Jones seeing similar declines.
Above: GBPUSD at daily intervals.
However, the UK's FTSE 100 and Germany's DAX are near record highs and are proving far more resilient, hinting at European outperformance that is, in turn, reflected in the European currencies against the Dollar.
Trump said on Monday that there's "no room left for Mexico or for Canada. No. The tariffs you know, they're all set. They go into effect tomorrow."
The decision means efforts by Mexico and Canada to avoid the tariffs were in vain and that Trump is not interested in negotiating.
Trump said the tariffs were about stemming the flow of drugs and illegal immigrants across the U.S. border, something the White House said the two countries had not addressed.
It appeared Trump wanted to use tariffs as a geopolitical negotiating tool. However, the actions and additional comments from Trump suggest the tariffs really are about rebalancing U.S. trade.
Trump said in the White House on Monday:
"Tomorrow, tariffs [at] 25 per cent on Canada and 25 per cent on Mexico, and that will start. So, what they’ll have to do is build their car plants, frankly, and other things in the United States.
"In which case, they have no tariffs... to people in Canada or Mexico. If they’re going to build their car plant, the people that are doing them, are much better off building here."
Above: Trump and Commerce Secretary Howard Lutnick in the White House.
Chinese goods see an additional 10% import tariff added to the 10% tariff added in February.
Ratcheting up the trade war, China said on Tuesday it would impose fresh tariffs on U.S. agricultural imports from March 10.
Beijing’s finance ministry has announced 15% duties on some US agriculture imports, including chicken, wheat, corn and cotton, and 10% tariffs on other produce such as soybeans, pork, beef, fruits, vegetables and dairy products.
Commodity currencies with exposure to China are under pressure, with the Australian Dollar already down 1% against the Pound in the first two days of this week. The New Zealand Dollar has fallen by a similar margin, taking GBP/NZD to its highest level since December 2015 at 2.2641.