On Wednesday, the BOC cut interest rates by 25 bps as was widely expected. But instead of the usual technicalities, the bank pointed the finger at geopolitics. Tariffs were top of mind for the central bank as met just days before US President Donald Trump has promised to impose 25% tariffs starting this Saturday.
The Loonie hardly budged despite the widening gap in interest rates as the Fed held its policy rate unchanged (a decision that Trump disagreed with publicly). That’s because the market had pretty much already priced in the easing move, and not the focus is on tariffs and the potential impact on the currency. That has left the USDCAD kind of bouncing around sideways as there is considerable uncertainty about whether the tariffs will be implemented, let alone what effect they will have.
To Tariff or Not To Tariff
President Trump of course insists that the tariffs of 25% on goods from Canada (and Mexico) are a go. But it’s not clear exactly how that would happen, and if it means “all” goods. Canada is a major exporter of fuel to the US, and there is a presumption that the White House would want to avoid increasing the cost of oil. The Trump administration has taken a series of measures to generally reduce the cost of crude in an effort to lower prices at the pump, and slapping tariffs on Canadian imported crude (Canada’s largest export) would seem counter to that objective.
Meanwhile Canada has prepared its own list of up to $105 billion in goods that it imports from the US which could be subjected to retaliatory tariffs. Outgoing Prime Minister Justin Trudeau has tried to strike a balance between insisting on “fighting” the tariffs and also saying that Trump likely doesn’t actually want the tariffs.
The Currency on the Brink
Many analysts have concluded that there is a wide range of possibilities to avoid the tariffs being implemented. They argue that Trump is returning to his usual practice of brinkmanship to get concessions in other areas. In his first administration, he threatened tariffs on Canada as a lead-in to renegotiate NAFTA into what’s now the USMCA trade deal. For this reason, some pundits have suggested that the real purpose of the threat of tariffs is to renegotiate the trade deal with Canada and Mexico.
Last weekend’s incident with Colombia is also cited as an example. There, Trump immediately threatened tariffs (among other measures) when the Latin American nation refused to accept a repatriation flight. The tariffs were never actually applied, because Colombia acceded to the White House’s demands.
Where Things Will Go From Here
The difficulty in assessing the situation is that it is not exactly clear what Trump’s demands on Canada are, and whether Trudeau can politically agree with them. In Colombia’s case, the situation was resolved quickly because what Trump demanded was something the Colombian government could easily acquiesce to. But it’s not certain if Trump is looking for more border controls, or better trade conditions, or something else entirely. What is being demanded is crucial to see if the brinkmanship will lead to an 11th hour agreement to avoid tariffs, or whether they will go into effect on Saturday.
Even with tariffs, which would likely shake up the market a bit, the impact on the respective economies might take some time. That could leave the market uncertain how to react, adding to volatility in the medium term. The consensus is that tariffs would weaken the CAD in the first instance. But that move could fade if there are more details or potential for further negotiation immediately afterwards.
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