Loonie Tumbles Amid Escalating US-Canada Trade War

The collapse of the US-Canada trade deal has sent shockwaves through the Forex market, causing the Canadian dollar to plummet. The loonie was one of the market's favorites before the breakdown in negotiations, supported by a rally in Brent crude and expectations of tighter monetary policy from the Bank of Canada.

The deal's collapse triggered a decline in Canadian bond yields and prompted investors to scale back expectations for BoC tightening. The futures market now prices in 65 basis points of monetary tightening by July 2027, down from 75 basis points before the deal fell apart.

New tariffs on roughly $20 billion of Canadian imports have taken effect, while Prime Minister Mark Carney has promised dollar-for-dollar retaliation against US pressure. However, investors may question whether a true 'tit-for-tat' response is realistic, given Canada's smaller economy compared to the US.