Canadian Dollar Under Pressure as Trade War Escalation Looms
Canadian Dollar: Trade War Escalation Threatens Recent Strength
MUFG's Derek Halpenny warns that a trade war escalation between Canada and the US could intensify Canadian Dollar (CAD) downside risks. The CAD has underperformed in G10 after talks broke down, with a 50% tariff on USD 20bn worth of US imports from Canada taking effect on Saturday morning at 12:01am.
The tariffs apply to a range of goods including beer, wine, spirits, milk products, and hockey equipment. However, Halpenny notes that these exports account for just 5% of Canada's exports to the US.
Halpenny argues that the medium-term FX response in Canada will be dictated not by this breakdown but by the evidence that this could escalate quickly and end with investors pricing greater economic harm for Canada. He warns that a quick retaliation by the US would force PM Carney to follow 'dollar for dollar', which could see investor confidence hit more severely.
Halpenny also notes that the current 2-year US-CA swap spread suggests USD/CAD has over-extended to the downside and should currently be trading around 1.4000, or approximately 2% higher than the spot close on Friday.