USD/CAD: Markets ponder next steps in trade war – Scotiabank

FXStreet Insights Team FXStreet

The Canadian Dollar (CAD) has weakened in response to President Trump applying 25% tariffs on Canadian exports to the US. A 10% tariff will apply to Canadian energy exports. In response, Canada has announced limited counter-tariff retaliation of 25% covering USD107bn of US exports to Canada. Canadian officials suggest they may pursue legal measure to remove tariffs but appear resigned to these measures remaining in place for some weeks at least, Scotiabank's Chief FX Strategist Shaun Osborne notes.

CAD weaker but off lows

"There are potential off-ramps, for example, but tariffs are clearly a big part of President Trump’s toolbox and—despite evident growth risks for the US economy from these actions—it’s hard to see an easy out for Canada from this situation. Limited retaliation from Canada tilts risks towards some additional BoC easing ahead as growth risks appear more significant than inflation at this point, given Canada’s partial tariff response. The CAD is at risk of weakening further against the USD. Markets had priced in the risk of some tariff action over the past few weeks but not, I believe, the full extent of the plans announced thus far."

"Given the 10% oil/energy carve out, the average tariff on Canadian exports to the US is around the 20% mark. The CAD may have to weaken to the 1.50-1.55 range to help offset the tariff impact. Uncertainties are high and significant— how long will tariffs last, will exemptions be granted, what will the US economy’s response be, are these measures subject to legal challenges?—and the CAD’s relatively benign response to developments thus far are perhaps not indicative of its likely performance in the weeks ahead."

"The USD rally early Monday has stalled on the short-term chart after peaking just under 1.48. The weekend advance has left a gap on the intraday chart between 1.4550/00 which markets may have to try and fill before the USD’s broader advance resumes. Recent, positive technical signs for the CAD have been overwhelmed by the USD’s jump to new, multi-year highs and sustained gains through the 1.4650/1.47 zone suggest medium term risks are tilted towards a push on to 1.50, if not higher."

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FXStreet Insights Team

FXStreet

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