Loonie Nears Covid-Era Low as Trump Signals Looming Tariffs

(Bloomberg) -- The Canadian dollar fell to its weakest in nearly five years following remarks from US President Donald Trump, who indicated that he would soon impose tariffs on the US’s neighbors.

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Trump told reporters on Monday evening that his administration is considering levying tariffs of 25% on Canada and Mexico by Feb. 1. The so-called loonie fell as much as 1.4% to a low of C$1.4516 in Asia trading, the currency’s lowest level since March 2020. The declines softened later in the day, with the currency down about 0.5% as of 10:30 a.m. in New York.

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Implementing the 25% tariff could push the loonie below C$1.50 against the US dollar, according to an analysis from the FX team at the Canadian Imperial Bank of Commerce published Tuesday. If a 10% tariff is applied to Canadian goods, excluding commodities and automobiles — the mildest scenario CIBC modeled — the USD/CAD pair would peak at C$1.4610.

“We expect the tariff premium to build,” the CIBC strategists wrote, adding that Trump’s White House will use “hawkish trade policy rhetoric as a negotiating tool for US-Canada issues.”

“We do not believe a permanent 25% sweeping tariff is a credible threat in the immediate future,” the strategists wrote.

Investors had been dumping the Canadian dollar after the surprise resignation of Prime Minister Justin Trudeau’s finance minister, Chrystia Freeland. It fell 6% in the fourth quarter of 2024, also dragged lower by Trump’s tariff threats.

Trudeau said Tuesday that Trump’s latest comments are designed to sow discord among US trading partners and weaken their negotiating position. The Canadian government has prepared a list of some C$150 billion in reactive tariffs against goods produced in the US, and Trudeau added that he supports the principle of dollar-for-dollar matching tariffs.

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Meanwhile, hedge funds have been boosting their bets on the loonie to weaken further. They hold nearly 89,000 bearish contracts against the Canadian currency, according to Commodity Futures Trading Commission data for the week ended Jan. 14 — near the most since August.

Toronto-based Picton Mahoney Asset Management last week said the loonie’s weakness “highlights investors’ negative sentiment towards Canadian markets, which face increasing economic uncertainty” after Trudeau resigned on Jan. 6 and put parliamentary business on hold until March.

Part of the loonie’s path could hinge on electoral politics. Freeland is vying to replace Trudeau — set to leave office in March — as leader of the Liberal Party, and is competing with Mark Carney, the former Bank of Canada and Bank of England governor. They’re the top contenders to face Conservative Party leader Pierre Poilievre in an election later this year.

Separately, currency traders on Tuesday largely ignored the release of softer-than-expected Canadian inflation data for December amid a federal sales tax holiday that began in the middle of last month.

Some strategists see the loonie recovering in 2025 since it’s already historically weak and because of the damage a tariff war could also inflict on the US economy.

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“The 25% tariff threat may be just that for now,” said Shaun Osborne, the chief foreign-exchange strategist at Scotiabank. “Economic harm to Canada and Mexico would be severe but repercussions for the US economy would be negative as well.”

--With assistance from Brian Platt.

(Adds comments from Justin Trudeau, details on Canadian inflation report.)

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