Image: Howard Lutnick. Source: The White House.
The Canadian Dollar could be set for relief on indications Donald Trump will row back on his tariff war with the USA's two neigbours.
Donald Trump could offer Canada and Mexico a compromise on tariffs as early as Wednesday, Howard Lutnick, the U.S. Commerce Secretary, said.
Lutnick revealed in an interview with Fox News that Donald Trump is planning to "work something out" with Canada and Mexico.
This is an indication that the President is ready to respond to a significant selloff in U.S. stock markets linked to fears that his tariff war is leading to an economic slowdown.
The U.S. imposed 25% tariffs on Canadian and Mexican imports on Tuesday, with Canada immediately responding with a reciprocal package, sparking a trade war in North America.
Developments saw the Pound surge to its strongest level since the Brexit vote of 2016 against the Canadian Dollar. GBP/CAD traded at 1.8450 on Wednesday but had been as high as 1.8540 ahead of the Lutnick comments.
The Canadian Dollar is at its weakest against the Euro since 2021 at 1.5330 EUR/CAD.
"There is no question in our mind that a recession in Canada and Mexico is now likely if these tariffs persist and that global growth risks are rising sharply," George Saravelos, currency analyst at Deutsche Bank.
However, a peculiar event has transpired in the past 24 hours: the Canadian Dollar has actually strengthened against the U.S. Dollar, defying a clear consensus in the analyst community that the U.S. Dollar was supposed to be an all-out winner of the trade war.
In fact, USD losses against the EUR and GBP and all other G10 currencies confirm it could be an all-out loser to trade wars, a reaction that won't sit well with Trump.
Above: GBPCAD at daily intervals.
"This reaction in USDCAD is one of the most mind-blowing things I have ever seen in thirty years of FX trading," says Brent Donnelly, analyst and founder at Spectra Markets.
"I suppose you can argue the dollar is so overvalued that even 25% tariffs on Canada cannot push USDCAD higher. If USDCAD doesn't go up on this, there is no reason to think EURUSD will go down on tariffs, either. Or AUDUSD," he adds.
The Dollar's relationship with tariffs has flipped from positive to negative, and Trump will have noticed: on his watch, the Dollar is tanking alongside stocks.
Trump placed great stock in the stock market's performance during his first presidency, and it's hard to believe he has changed.
Above: USDCAD at 15-minute intervals, showing the CAD strengthened against USD when the U.S. import tariffs were confirmed.
Lutnick said that the Mexicans and the Canadians have been communicating with him, "trying to show that they’ll do better, and the president’s listening, because you know he’s very, very fair and very reasonable."
"It's not going to be a pause, none of that pause stuff, but I think he’s going to figure out: you do more and I’ll meet you in the middle some way and we’re going to probably announcing that tomorrow," said Lutnick.
If we get some headlines on the rowing back of tariffs, the Canadian Dollar could be due for a significant recovery rally in the next few days.
The forceful response from Canada, where Prime Minister Trudeau is unwilling to yield, has also rattled markets and caught Trump's attention.
Trudeau gave a fiery speech on Tuesday, calling the tariff war "dumb" and that Trump wants to trigger the "complete collapse" of the Canadian economy to make it easier for the United States to annex Canada.
Canada announced it would implement 25% tariffs on $155BN worth of American products, starting with $30BN worth of goods immediately and the remaining $125BN in 21 days.
The response suggests that Canada has a strong hand, and Trump could be readying to yield.