Canada Matches Tariffs, Escalating Trade War with US
A breakdown in negotiations between the US and Canada has led to a tariff on USD 20bn worth of Canadian exports, but the impact on the Canadian dollar may be limited. The Canadian government has vowed to match the tariffs 'dollar for dollar,' which could escalate the situation quickly.
According to MUFG Research, the Canadian dollar is the clear underperformer in G10 currencies so far today. Despite recent optimism about a deal being struck, the market had begun pricing in a positive outcome, and CAD has understandably been undermined in early trading this week.
The tariffs on USD 20bn worth of US imports from Canada account for just 5% of Canada's exports to the US. However, the response from PM Mark Carney opens up a round of retaliatory tit-for-tat actions that could see a quick spiral.
USD/CAD and the 2-year swap rate spread have moved very tightly together over most of the post-covid period, starting in 2022. The current 2-year US-CA swap spread suggests USD/CAD has over-extended to the downside and should currently be trading a little above the 1.4000 level.