Loonie Resists Tariff-Induced Decline, USD/CAD Seen Topping Out at 1.39-1.40
The Canadian dollar has shown surprising resilience in the face of new US tariffs on Canadian goods. Despite the 50% tariffs, which can typically slow growth and hurt a currency, the loonie has managed to stay relatively steady thanks to decent fundamentals and energy prices.
UBS, a global bank, notes that while there is a near-term risk for Canada due to the tariffs, the bigger driver of the US dollar (USD) against the Canadian dollar (CAD) exchange rate is interest-rate expectations. When investors expect the Federal Reserve to keep rates higher than the Bank of Canada, it tends to push USD/CAD up.
However, UBS thinks that the trade shock may lead markets to rethink both central banks' paths, which could prevent a significant widening of the Canada-US rate gap and limit the potential for a sustained jump in USD/CAD. As a result, instead of reaching recent highs near 1.42, UBS sees USD/CAD topping out around 1.39-1.40.