Deutsche Bank sees ‘very real possibility’ that Canadian dollar tests all-time low

Deutche Bank believes that trade war risks are higher than markets are pricing and is out with a note saying the loonie is “out of the most under-priced” currencies around trade war risks.

Deutche Bank that Trump does have the legal authority to impose 25% tariffs but they expect that Canada would retaliate with tariffs of its own and could also use export taxes, something they call “the most-potentent weapon in Canada’s arsenal.”

A trade war would put Canada into recession and monetary policy would be the main lever to cushion the economy. In that case, they see the Bank of Canada cutting rates to at least 1.50% compared to the 2.75% priced currently.

In that scenario they see USD/CAD rising to “at least” 1.53 “with a very real possibility” of a test of the 2002 all-time high of 1.61.

Finally, they note that if the Trump administration hits Canada hard on tariffs, it doesn’t bode well for the rest of the world.

Canada will be an important
bellwether for Trump’s global trade agenda. It’s difficult to think of another
country that has been a more cooperative partner with the US across almost
every policy area. Therefore, we view Trump’s approach to Canada as likely
setting the minimum bar for his hawkish trade policy.

USD/CAD was last up 61 pips on the day to 1.4380.

This article was written by Adam Button at www.forexlive.com.