Canadian dollar nears 70 cents US as tariff threat recedes

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The Canadian dollar was back to flirting with the 70 cents U.S. level on Tuesday with the immediate threat of a trade war on hold for the next month.

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On Monday, it was a question of how low the loonie could go as it fell below 68 cents U.S. for the time since 2003. The question has now shifted to how high can the currency rise against the greenback, especially given that some think the tariff threat has permanently faded.

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“We can safely say this tariff file overhanging Canada and Mexico is going to fade away,” David Rosenberg, founder of Rosenberg Research and Associates Inc., said in a note on Tuesday “The 30-day reprieve is a joke. Trump is not raising tariffs and probably was never going to.”

After Monday’s apparent last-minute reprieve, the Canadian dollar rose 3.4 per cent and was trading at 69.89 cents U.S. after falling as low as 67.6 cents U.S. late Sunday night as the tariff deadline loomed nearer.

Canada “has been spared a deep recession,” Rosenberg said.

As for the loonie, the gains of the last two days have reversed “roughly half” of the currency’s fall against its American counterpart since talk of tariffs began on Nov. 25. That’s when United States President Donald Trump first floated the threat of across the board tariffs via his Truth Social platform against Canada and Mexico.

Prior to Nov. 25, the loonie was trading at around 71.5 cents U.S.

So is that the ceiling for the currency in a tariff-free landscape?

“We would expect much of the tariff premium to be priced out, as it looks likely that a deal will be made,” Noah Buffam, an analyst in Canadian Imperial Bank of Commerce’s fixed income, currency and commodity unit, said in a note on Tuesday morning.

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In the near-term, CIBC is looking for the Canadian dollar to hit 70 cents U.S.

But that strength could be short-lived.

If the dollar does regain the remainder of its losses post Nov. 25, Rosenberg thinks the currency once again becomes a target for short-sellers.

“A full reversal will present a great shorting opportunity again,” Rosenberg said.

That’s because Canada continues to post weak economic performances compared with the U.S. Gross domestic product numbers released last Friday suggests the Canadian economy is on track to expand by 1.8 per cent in the fourth quarter compared with 2.3 per cent in the U.S. Further, the Canadian economy is expected by the Bank of Canada to continue to operate in a state of “excess supply” — where more is being produced than consumed — into next year.

“The first two points will ensure that the deep negative interest rate spreads go even deeper,” Rosenberg said.

Last week, the Bank of Canada cut interest rates by another 25 basis points to three per cent, while the U.S. Federal Reserve held rates at 4.25 per cent to 4.5 per cent, as policymakers there indicated a strong jobs market and some “sticky” inflation had stayed their hand on rates.

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A 150 basis point spread separating the Canada and U.S. lending rates can only benefit the greenback, as investors continue to pour money into the U.S. to take advantage of higher interest rates.

“But this whole (tariff) episode is a reminder that we are going to be in a constant state of uncertainty,” Rosenberg said.

• Email: gmvsuhanic@postmedia.com

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