The Canadian dollar is falling further against the U.S. dollar as the collapse of Canada–U.S. trade talks is resulting in further tariffs and trade tensions.
After the two countries failed to reach an agreement on Aug. 21, the United States imposed 50 percent tariffs on roughly $28 billion of Canadian goods the next day, covering products including dairy, wine, wood, furniture, and cement.
In response, Canadian Prime Minister Mark Carney said Canada would respond with its own tariffs starting on Sept. 8, targeting U.S. steel, dairy, agricultural equipment, paper, and electronics.
As of 2:10 p.m. EST, the Canadian dollar was trading at 72.16 cents U.S. compared to 72.67 cents U.S. on Aug. 21, representing a decline of 0.7 percent.
Meanwhile, the S&P 500 was down 14.46 points to 7,659.13, while the TSX Composite Index was up 13.96 points to 36,634.19.
While it’s unlikely that there will be a large sell-off of the Canadian dollar in response to the breakdown of trade talks, the loonie “is the clear underperformer” in the Group of 10 (G10) currencies on Aug. 24, Derek Halpenny, head of research of global markets EMEA at MUFG, said in his FX Daily Snapshot.
Halpenny highlighted Carney’s comments about matching the U.S. tariffs “dollar for dollar” and allusions to trade war and getting “attacked.” Carney also criticized the United States’ failure to adhere to the Canada–United States–Mexico Agreement and said America sometimes signs deals “in pencil.”
“By promising to match dollar for dollar that risk of spiral is real,” Halpenny wrote, noting that the undermining of the Canadian dollar is understandable given that the market had recently begun pricing in a positive outcome. Carney said on Aug. 24 that it may not be practical to impose retaliatory tariffs “dollar-for-dollar” against the United States given that its economy is much larger than Canada’s, and therefore Ottawa may take a more targeted approach with its tariffs.
U.S. President Donald Trump said on Aug. 24 that he will be imposing new 50 percent tariffs on Canadian autos.
Despite its poor performance on Aug. 24, Halpenny said the Canadian dollar had been the third-best-performing G10 currency in August, helped by higher crude oil and investors’ optimism that a deal was likely.
The goods impacted by the new tariffs account for 5 percent of all Canadian exports to America, and while the initial size appears manageable, Carney’s response opens up “a round of retaliatory tit-for-tatt actions that could see a quick spiral,” said Halpenny.
While crude oil prices remain supportive, that support could fade if energy price increases undermine global growth prospects, he added. Canada’s retaliatory response could also affect investor confidence, while dollar-related downside risks could intensify the longer the trade war continues.
Derek Holt, vice-president and head of Capital Markets Economics with Scotiabank, wrote in an Aug. 24 daily note that there have been “only mild market reactions” so far to the news.
While the Canadian dollar is weaker compared to the U.S. dollar—but only by half a penny since Aug. 21—some weakness is due to lower oil prices and a decline in futures, he said. Other weakness is also due to a “slightly firmer overall” U.S. dollar and a decline in Canadian government bond yields.
“It’s clearly disappointing that all signs were pointing to a deal being consummated as late as well into Friday evening only to fall apart minutes before the midnight deadline when additional US tariffs kicked in,” Holt stated in a note on Aug. 23.
“There are no winners in trade wars, only losers, including the United States and its consumers and businesses.”
Holt noted that the 50 percent tariffs on $28 billion worth of imports raised the effective tariff rate on U.S. goods imports to 11.5 percent and on goods and services to 9.6 percent. The additional American tariffs also raise the effective tariff rate on total Canadian goods and exports and services to 4.6 percent—still the lowest imposed on any of America’s trading partners.
