Canadian dollar nearing 71 cents US amid ‘tariff fatigue’

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The Canadian dollar continued to climb on Friday after closing above 70 cents U.S. on Thursday for the first time since December, as its counterpart in the United States slid on “tariff fatigue.”

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The loonie was trading at 70.62 cents U.S., up 2.7 per cent since it dipped below 69 cents U.S. on Jan. 31, the day before Donald Trump claimed he would implement across-the-board tariffs on exports from Canada and Mexico.

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With those tariffs on hold and few details, if any, on Trump’s latest threat of global reciprocal tariffs, several analysts suggest the “tariff premium” that the U.S. dollar enjoyed is slowly disappearing.

The loonie was “slightly stronger against the (U.S. dollar) overnight as the tariff premium continues to come out of the USD,” Noah Buffam, a currency analyst at CIBC Capital Markets, said in a note on Friday, adding that “we expect a continued slow unwind of the tariff premium.”

Karl Schamotta, chief currency strategist at Corpay, echoed that sentiment.

“Benchmark 10-year Treasury yields are down, equity markets are up, and measures of financial market volatility are well off their highs as ‘tariff exhaustion’ kicks in,” he said in a note on Friday.

Several other major currencies rose.

The pound was trading at year-long highs, the euro was up against the U.S. dollar and the Canadian dollar, and the Mexican peso added “to gains ahead of the North American open,” Schamotta said.

Investors seem to be smelling a rat on this tariff file

David Rosenberg

Economist David Rosenberg at Rosenberg Research & Associates Inc. said “investor skepticism” over Trump’s tariff strategy was growing.

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“Investors seem to be smelling a rat on this tariff file,” he said in a note on Friday. “First, a reprieve for Canada and Mexico. Second, no action yesterday on these so-called reciprocal tariffs.”

For the time being, there is some breathing room on the trade war front.

Howard Lutnick, Trump’s Commerce Secretary nominee, on Thursday said an analysis of “unfair” trade practices, including trade barriers, currency manipulation, value-added taxes and subsidies, and regulations, will be completed by April 1.

Buffam said the White House had also indicated on Thursday that it was “not ruling out a flat global tariff,” which he said could be interpreted to mean that reciprocal levies might take the place of a broad global tariff.

Rightly or wrongly, fears of a global trade war are easing

Karl Schamotta

“Rightly or wrongly, fears of a global trade war are easing,” Schamotta said.

Now, investors will be looking at how much more upside there is for the loonie.

It was trading around 71 cents U.S. prior to Trump lobbing his first tariff grenade of 25 per cent against Canada and Mexico on Nov. 25.

In the near term, CIBC is calling for the Canadian dollar to rise further to a target of 71.7 cents U.S.

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“The (U.S. dollar) looks set to remain on the defensive as the tariff-related risk premium slowly erodes,” Buffam said.

The Canadian dollar breaking through the 71 cent U.S. level is “absolutely possible,” Schamotta said in an email, adding he believes a “tariff discount” is still weighing down the loonie.

“Traders could move to wipe that out. But, just like second marriages, that would represent the triumph of hope over experience,” he said. “We know that Trump isn’t going to stop threatening Canada, so any unbridled sense of optimism isn’t likely to last.”

• Email: gmvsuhanic@postmedia.com

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