The Canadian dollar, often called the loonie, has bounced back after hitting a 22-year low against the U.S. dollar. On Monday, the loonie gained a lot of its value back as investors hoped Canada might get a break from U.S. tariffs. The loonie had fallen to 1.4793 against the U.S. dollar, the lowest since April 2003, but it came back to 1.4590, equal to 68.54 U.S. cents.
This recovery happened after U.S. President Donald Trump said he would wait a month to put tariffs on Mexico because Mexico agreed to send 10,000 National Guard troops to stop illegal drugs at its northern border. This news made people think Canada might also get a one-month break from new tariffs. Karl Schamotta, a market expert at Corpay, said the Canadian dollar, the euro, and the Mexican peso are all going up fast.
He said this is because markets expect good news for Canada. But a Canadian government official told the New York Times that Canada is not counting on getting the same one-month pause as Mexico. This recovery comes as President Trump put a big 25% tariff on products coming from Canada and Mexico.
In response, Canadian Prime Minister Justin Trudeau said Canada would put 25% tariffs on $155 billion of American goods. These tariffs could have a big impact and might lead to a trade war that hurts both countries’ economies. Last week, the Bank of Canada cut its key interest rate by 25 basis points to 3%, warning that an ongoing trade fight could really damage the economy.
Investors think there is more than an 80% chance the central bank will lower rates again in March.
Loonie’s recovery amid trade tensions
Even though some exports went up in the short term as clients tried to beat the tariffs, overall confidence in trade is still clouded by the tariff dispute.
Canadian bond yields also went down, with the 10-year yield falling 13.6 basis points to 2.929%, after hitting its lowest since September. The trade tensions have brought back worries that the USD/CAD exchange rate could reach 1.50. How long U.S. tariffs last and what the Bank of Canada does in response will be key factors.
Investors are looking for signs that things are calming down before fully committing to the Canadian dollar, which is now oversold. In December, it became clear that the U.S. tariffs on Canada and Mexico were a step away from the USMCA deal President Trump made in 2019. Starting Tuesday, all non-oil exports from Canada to the U.S. will have a 25% tariff, while oil exports will have a 10% tax.
Canada has already put 25% tariffs on certain U.S. imports in response. It is hard to know exactly how these tariffs will affect the economy. The Bank of Canada’s January report said U.S. tariffs could slow Canadian growth by about 2.5 percentage points in the first year, with the bad effects getting smaller over three years.
Inflation could also be affected in different ways, with consumer prices possibly going up between 0.5 to 1.0 percentage points over three years, but the BoC said prices might go up faster. In short, while the Canadian dollar has shown it can recover, the ongoing trade tensions and possible economic impacts need to be watched closely. The Bank of Canada and government officials will need to take careful actions in response.