MUFG: USD/CAD rise to 1.50-1.60 range on broad 25% US tariffs

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.