January 22, 2025 at 07:40PM
MUFG warns that a 25% tariff on all Canadian imports by the US could push USD/CAD into a 1.50-1.60 range. While markets remain optimistic that negotiations will dilute or avert the tariff threat, escalation risks loom as the 1st February deadline approaches.
Key Points:
Recent USD/CAD Moves:
USD/CAD hit a high of 1.4516, breaking 1.4500 for the first time since March 2020, but retraced gains as optimism about a potential tariff resolution grew.
Investors believe negotiations could lead to carve-outs or a reduced tariff rate.
Tariff Impact on USD/CAD:
A broad 25% tariff would likely push USD/CAD well above its 2020 (1.4668) and 2016 (1.4690) highs, with a move into the 1.50-1.60 range, last seen in 2003, coming into play.
Risks to Canada’s economy from retaliatory measures and external demand loss could exacerbate CAD weakness.
Canada’s Position and Response:
Canada’s inflation backdrop is more favorable than the US, potentially allowing the Bank of Canada (BoC) to lower rates to cushion the economic blow.
Prime Minister Trudeau has indicated support for dollar-for-dollar retaliation if tariffs are implemented.
Forecast Adjustments:
MUFG’s current Q1 and Q2 USD/CAD forecasts of 1.4500 and 1.4400 do not incorporate the potential tariff scenario.
Should the tariff be implemented, USD/CAD would see significant upside, depending on the outcome of negotiations.
Conclusion:
While markets remain hopeful for a negotiated resolution, a failure to avert tariffs could propel USD/CAD to levels not seen since 2003. Investors will closely monitor developments as the 1st February deadline approaches.
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This article was written by Adam Button at www.forexlive.com.
