Canada-US Trade War: 50% Tariff Slams Loonie, USD/CAD Approaches 1.40

The Canadian dollar has suffered its worst single-day performance against the US dollar in over two months following the breakdown of trade negotiations between Canada and the United States.

The imposition of a 50% tariff by the US on billions of dollars worth of Canadian goods is significantly depressing the Canadian dollar through three channels: downward revisions to growth expectations, cooling expectations for interest rate hikes in Canada, and the rebuilding of short positions.

Derek Halpeny, Head of Global Market Research for Europe, the Middle East, and Africa at Mitsubishi UFJ Financial Group, stated that Canadian Prime Minister Mark Carney's commitment to implement 'equivalent retaliation' against US tariffs poses additional risks to investor confidence.

Mitsubishi UFJ Financial Group expects the Canadian dollar to fall to CAD 1.41 per USD in the third quarter, with Elias Haddad, Global Market Strategist at Brown Brothers Harriman, warning that the escalating trade war will weaken market expectations for interest rate hikes in Canada and potentially lead to a decrease in US Treasury yields.