As anyone who has planned a trip to the U.S. recently knows, the loonie is weak — and investors are betting it will only get weaker.
Driving the news: JPMorgan reported that demand for hedges against a falling Canadian dollar — assets that will increase in value if the loonie falls against the U.S. dollar — have surged in recent weeks to all-time highs.
Why it’s happening: Traders worry that Donald Trump will make good on his threats to slap heavy tariffs on Canadian imports, a move that would likely drive the value of the loonie down even further.
- While Donald Trump has softened his election campaign promise to hike tariffs on imports from China, he has reiterated threats against Canada and Mexico, saying he’ll impose tariffs by February 1.
Why it matters: Increased hedging against a falling loonie is a warning sign that the people who manage money for a living are taking the risk of a Canada-U.S. trade war seriously.
What’s next: How a trade war impacts the loonie will depend on the size and scope of U.S. tariffs, and what Canada does in response.
- On the one hand, reduced demand for Canadian exports and slower economic growth (which could push the Bank of Canada to lower interest rates) would weaken our currency.
- However, those effects could be offset to some extent by the cheaper loonie making Canadian exports more competitive and costlier U.S. imports adding to inflation and forcing the central bank to keep rates higher.
Bottom line: We can hope that this trade fight just blows over but more of the pros are betting it won’t.—TS