MUFG Warns US Tariffs Threaten Loonie's Value Ahead of 1.4000 Threshold
MUFG analysts are warning that the Canadian dollar is vulnerable to a downward spiral due to the newly enforced US tariffs on $20 billion of Canadian goods. The 50% import penalties, which took effect at 12:01am on Saturday, cover products including beer, wine, spirits, milk goods, and hockey equipment, representing 5% of Canada's exports to the US.
The analysts point out that the currency underperformed its G10 peers after negotiations to avert the measures broke down, with the risk of retaliatory action described as a key driver of medium-term FX pricing and broader Canadian market conditions. If the conflict remains unresolved, fading support from higher oil prices will also be an additional headwind for the Canadian dollar.
In their analysis, MUFG notes that the USD/CAD spot rate is currently over-extended to the downside, with a level above 1.4000 implied by the current 2-year US-Canada swap rate spread. This gap of roughly 2% from last week's close presents an opportunity for options traders looking to capitalize on a rapid upward correction.