Opinions Joost Derks
A hard hit for the loonie: where does it end?
A new Trump trade measure is leaving the Canadian dollar cold. But that's mainly because the currency is already going through a very difficult time due to falling oil prices and a sputtering economy.
The Canadian dollar is taking a beating. For anyone following the news, this won't come as a surprise. US President Donald Trump announced last weekend that import tariffs would be increasing by 10%. The measure is in response to a commercial in which the Canadian province of Ontario satirizes Trump's trade policy. The commercial uses a portion of former Republican President Ronald Reagan's speech, in which he calls import tariffs harmful. Although Ontario quickly promised to withdraw the commercial, it still aired last weekend during the intermission of a popular baseball game.
TACO, so no problem
The additional import duties, however, have had little impact on the exchange rate of the loonie, as the Canadian dollar is also known. The currency has remained relatively stable against the US dollar in recent days. A key reason is that currency markets are taking Trump's measures with a grain of salt. "TACO," short for "Trump Always Chickens Out"—or "Trump gets scared at the last minute"—has become a familiar term in the financial world. It seems only a matter of time before the trade tensions between the neighboring countries are smoothed over. So, the loonie's slide isn't a frustrated Trump outburst.
Loonie under pressure
Instead, falling oil prices and a sputtering economy are hurting the currency. Canada is one of the world's five largest oil exporters. Oil prices have been hovering around multi-year lows in recent weeks. A barrel of Brent crude is currently selling for around $65. That's over 15% lower than in mid-June. The same barrel cost nearly $120 in June 2022. This means there's significantly less demand for the loonie from oil-importing countries. Moreover, Canada's economy is struggling. The growth rate has slowed to just over 1%, while unemployment has slowly risen to over 7%. Inflation crept up to 2,4% in September.
Central banks' turn
Still, it would be very strange if the Canadian central bank didn't lower its policy rate by 0,25 percentage points next Wednesday to give the economy some breathing room. Just like the falling oil price, the interest rate cuts by the Bank of Canada (BoC) are also putting pressure on the loonie. A lower interest rate makes it less attractive to hold assets in a currency. Although the Federal Reserve is also likely to lower its interest rate a notch this week, the BoC's rate cut has a greater impact at the current rate of 2,5% than at the US interest rate of 4%. Can the loonie only fall further? The tepid reaction to the Trump tariff indicates that a lot of misery has been priced in. A small windfall could easily give the currency wings.
Joost Derks
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