Loonie loses amid protectionist proposals

“Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!”  The first 100 days of the Trump Presidency ends this Saturday and it seems we are back to monitoring @realDonaldTrump tweets once again. After the above Trump volley, the Canadian dollar, aka the ‘loonie’ and other commodity currencies too, tanked hitting key levels across the board. This escalation of tariff wars and protectionism had gone quiet over the past weeks but this tweet has certainly roiled currency markets with the potential for increased volatility ahead.

Aside from Canada’s unfair dairy practices being highlighted, they are not new and go back several years. However, U.S Secretary Ross also stated that the U.S is considering tariffs on imports of Canadian softwood of up to 24% on five lumber exporters. Broadly, this resumption of trade hostilities puts the emphasis firmly back on Nafta and means increased uncertainty over trade relations between the U.S and Canada. The U.S is of course Canada’s largest export market and Canada itself is the U.S’s largest trading partner.

Commodity currencies also got hit with AUD now on key support around the 0.75 zone and NZD on the 0.69 level. New Zealand is the world’s largest exporter of milk and the $12bn dairy industry would certainly be impacted by any new tariffs, and with it the country’s economy.

It is the loonie, however, which is in the crosshairs at the moment. With softer domestic inflation data last week and oil prices declining, CAD has underperformed its peers and is now the only G10 currency to fall versus the big dollar this year. Indeed, trade frictions are one of the uncertainties recently highlighted by the Bank of Canada.

From a technical perspective, USD/CAD is now at a key structural level above 1.36, having rallied to 14 month highs on the tariff news. We can see on the daily candle chart that prices broke out of the recent consolidation range and quickly advanced through 1.35. This move came after the pair rejected the wide watched 200 day Moving Average earlier this month. Although short-term momentum is clearly bullish, there are signs of a false breakout so near-term price action will be key.

USD/CAD Daily Candle Chart

If we can surmise anything from the first 97 days of this Presidency, a very strong broadside (Tweet) is often fired before more formal talks begin. Whether then this is a prelude to more protectionist policies or not, the loonie, as well as the other commodity currencies are at critical levels. Perhaps it will be policy divergence between the Central Banks that decides direction. However, with the Administration also potentially planning trade actions to protect U.S aluminium, semiconductors and shipbuilding, we will keep a close eye on those Tweets going forward...