Canadian Dollar: Trade war escalation threatens recent strength – MUFG
MUFG's Derek Halpenny argues the Canadian Dollar’s (CAD) reaction to the new US tariffs on USD 20bn of Canadian exports will hinge on escalation risks rather than the initial measures.
Canadian Dollar (CAD) has underperformed against the G10 currencies since the breakdown of negotiations regarding US tariffs on Canadian exports. MUFG's Derek Halpenny warns that tit-for-tat tariffs and dwindling support from higher oil prices could intensify CAD's downside if the dispute remains unresolved. Although a large sell-off of the Canadian dollar is unlikely, CAD remains the clear underperformer in G10 currencies.
The medium-term FX and broader market response will depend on whether the trade war escalates rapidly and negatively impacts Canada's economy. The 50% tariff on USD 20bn worth of US imports from Canada accounts for only 5% of Canada's exports to the US, but a quick retaliation by the US could force Prime Minister Carney to match dollar-for-dollar, potentially causing severe investor confidence loss.
The 2-year US-CA swap spread suggests that USD/CAD has over-extended to the downside and may be trading around 2.0% higher than the spot close on Friday.
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