USDCAD: Tariffs delayed

The elephant in the room

The focal point of late has undoubtedly been US President Trump’s
proposed tariffs on Canadian goods shipped to the US. A 25% universal
tariff rate would be troublesome for the Canadian economy—despite
the exemption for energy products. But it would also have a notable
stagflationary effect on the US—making it an expensive strategy for Trump.
Further, Canada laid out its retaliation strategy which is designed to
respond in kind. We still think the tariffs will not be implemented in that
form and “deal making” will remain key in the Trump administration’s
strategy.

Canada not in a good place to begin with

Canada remains in a weak negotiation spot politically without a
functioning government in place and new elections likely later in 2Q.
Moreover, the economy is hurting given its high interest-rate sensitivity and
elevated Bank of Canada (BoC) policy rates for some time. Accordingly, the
BoC struck a cautious tone in their policy meeting last week and noted
their readiness to react to any economic shock in relation to US tariffs.
This would be much needed given fiscal stimulus is unlikely to come to the
rescue given Parliament remains prorogued until March.

USDCAD to retest 1.46 highs—even without tariffs

The market reaction to Trump’s proposed tariffs was rather benign and
was completely reversed following the delay in implementation. From here,
we do not see much of a risk premium priced into USDCAD and, rather,
the pair trades below what rates differentials suggest. While we do not
expect the tariffs to be implemented in the aforementioned form, a risk
of some adverse trade action remains. We think USDCAD can test 1.46
again in the coming months before edging lower later in the year. Broader
USD strength might also be enough to get there—even in the absence of
tariffs on Canada.