Trade Rhetoric Poses Big Risk for Loonie

Market Trends - 26/04/2017

In another shot across the bow from the Trump Administration’s growing focus on unfair trading practices, Canada has found itself in the US’ crosshairs ahead of planned trade talks.

The move earlier in the week by Commerce Secretary Wilbur Ross to slap tariffs as high as 24.00% on Canadian softwood lumber exports immediately drew the ire of the Canadian government, which heated the rhetoric further.

Even though Canada is America’s second largest trading partner (behind China but ahead of Mexico), the long-running arguments on lumber and dairy are coming to the forefront as the US Administration looks to bolster its credibility as being tough on trade.

In a move that was highly reminiscent of the selloff in the Mexican Peso in the run up to the US election, the Canadian dollar has found itself under significant pressure over the last two sessions.

Although leaders insist a trade war is not on the horizon, the move does set a strong precedent for forthcoming negotiations.

Although the lumber economy comprises just a small fraction of Canadian trade with the United States, accounting for approximately $5 billion in annual exports compared to total exports of nearly $297 billion in 2016, it sets the stage for a larger conflict.

The bigger looming risk factor for Canada are other areas of export relations with the United States, namely energy and automotive parts which account for the lion’s share of trade headed to the United States.

Should the rhetoric become more heated over time, it could threaten a significant portion of Canadian economic activity.  At a time when domestic fundamentals are somewhat shaky given some of the latest data, a trade war is in no one’s best interest.

Take for example retail activity, with sales tumbling -0.60% in February, marking the worst result since March of 2016.  Without better consumption, inflation may be elusive, putting the Bank of Canada in a bind and forcing more accommodation.

Should this occur, the losses in the Loonie could rapidly accelerate.

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