Canadian Dollar: Trade dispute weighs on outlook – Commerzbank

Volkmar Baur at Commerzbank notes that new United States (US) tariffs of 50% on selected Canadian dairy, alcohol and automobile products under Section 338 will remove United States-Mexico-Canada Agreement (USMCA) exemptions. While the Canadian Dollar’s (CAD) initial reaction was muted, he argues this trade dispute will dominate CAD news in coming weeks and that the loss of free trade benefits is likely to weigh on Canadian exports.

US tariffs and Canadian Dollar risks

"Donald Trump decided yesterday to impose new tariffs on Canada. Based on Section 338 of the Tariff Act of 1930, Canada is accused of unfairly discriminating against US products in the dairy and cheese sectors, alcoholic beverages, and automobiles. The U.S. government has therefore issued three notices (dairy, alcohol, and automobiles), each containing a list of products that will now be subject to a 50% tariff and are no longer eligible for the USMCA exemption."

"The Canadian dollar did not initially react noticeably to this development. The loonie did lose some ground yesterday. However, this could also have been due to the fact that the overall inflation rate in June came in slightly lower than analysts had expected in the median."

"Given the multitude of threats Donald Trump has made in recent months - not all of which have been carried out - the muted reaction seems reasonable for now. However, it is also clear that this issue will now dominate the news surrounding the Canadian dollar in the coming weeks. In particular, the fact that the existing USMCA free trade agreement no longer applies to these products is an important aspectthat is likely to weigh on Canadian exports."