The Canadian Dollar experienced a tumultuous session on Tuesday, as it whipsawed against the US Dollar, falling 0.9% at its lowest point. This decline marks the third consecutive session where the Loonie has lost ground against the Greenback. The currency fell roughly six-tenths of one percent amid escalating trade tensions between Canada and the United States. These tensions have been fueled by US President Donald Trump's recent vow to impose an additional tariff on Canadian steel and aluminum, bringing the total tariff to a staggering 50%.
Ontario Prime Minister Doug Ford responded by announcing a flat export tax of 25% on all electricity sent to the United States. This move is seen as a direct retaliation against the US tariffs and adds another layer of complexity to the already strained trade relations. Investors and markets are increasingly worried about the potential economic fallout from these trade disputes, which has added pressure on the Canadian Dollar.
Meanwhile, the Bank of Canada is expected to deliver its latest rate call on Wednesday. This announcement is being closely watched by investors who are concerned about the implications of the ongoing trade war on Canada's monetary policy.
Trade Tensions Escalate
The trade tensions between Canada and the United States have been brewing for some time, but recent events have brought them to a head. President Trump's announcement of additional tariffs on Canadian steel and aluminum sent shockwaves through the markets, causing the Canadian Dollar to fall. The USD/CAD pair has risen around 2% over three straight trading days as the Loonie continues its backslide against the Greenback.
"The paperwork on additional steel and aluminum tariffs targeted at Canada hasn’t been ‘signed’ in an effort to cross the moat that President Trump continues to dig for the US." – White House officials
This statement from White House officials highlights the uncertainty surrounding the trade measures and their implementation. Despite this, the threat alone has been enough to unsettle investors and send ripples through the currency markets.
In 2024, Mexico, China, and Canada accounted for 42% of total US imports, with Mexico standing out as the top exporter with $466.6 billion, according to the US Census Bureau. The significance of Canada as a major trading partner for the United States cannot be understated, making these developments all the more critical.
Economic Implications Loom
The potential economic implications of these trade tensions are significant. The USD remained under pressure and supported XAU/USD due to investor concerns about the ongoing trade war. Gold prices reversed direction following Monday's decline and traded above $2,910 on Tuesday, reflecting investor sentiment towards safer assets amidst market uncertainty.
Ontario's newly imposed export tax on electricity could have ramifications for both Canadian and US markets. As a major supplier of electricity to parts of the United States, any disruption in this supply chain could lead to increased costs for consumers and businesses alike.
President Trump also reiterated his misunderstanding of Canadian cap-trade tariffs on US dairy products, which has been another point of contention between the two nations. These misunderstandings underscore the complexities involved in international trade negotiations and their potential impact on bilateral relations.
Market Reactions and Future Outlook
As markets brace for further developments, attention turns to the Bank of Canada's upcoming rate call. The central bank's decision will be scrutinized for indications of how it plans to navigate these turbulent waters. The Loonie, having somewhat recovered its footing from earlier losses, still remains down against the US Dollar for a third straight session.
The broader implications of these trade tensions extend beyond currency markets. Investors are keenly aware that prolonged disputes could affect economic growth prospects in both countries. The specter of retaliatory measures looms large, with each side potentially escalating actions in response to perceived injustices.