The Canadian dollar has shown surprising resilience in the face of new US tariffs, holding its ground even as trade tensions escalate. According to UBS, a global investment bank, the loonie—as Canada's currency is commonly known—is being supported by solid economic fundamentals and firm energy prices. However, the bank cautions that the currency could still face near-term weakness as markets recalibrate their expectations.
What's behind the new tariffs?
The United States has imposed additional 50% tariffs on Canadian goods, a move that goes beyond the framework of the United States–Mexico–Canada Agreement (USMCA). The US invoked Section 338, a rarely used trade law that allows tariffs on countries that are seen as discriminating against US commerce. In response, Canadian Prime Minister Mark Carney announced reciprocal measures, further escalating the trade dispute.
Tariffs typically weigh on a currency because they can dampen economic growth. When exports face higher costs, demand for those goods can cool, and business confidence may fade. That's the near-term risk for Canada, according to UBS. The bank notes that while the loonie has support from strong fundamentals and energy prices, the trade friction could still push the currency lower in the short term.
Why the loonie is holding up
Despite the tariff shock, the Canadian dollar has remained relatively stable. One key factor is the strength of Canada's economy, which has shown resilience in the face of trade headwinds. Additionally, energy prices—Canada is a major oil exporter—have been supportive, helping to offset some of the negative sentiment from the tariffs.
UBS sees the USD/CAD exchange rate staying capped around 1.39 to 1.40 in the near term. That means the US dollar is unlikely to strengthen much beyond that level against the loonie, even with the tariffs in place. The bank's view suggests that while there is room for the loonie to dip, the downside may be limited.
What it means for investors
For everyday investors, currency movements can have a direct impact on portfolios. A weaker Canadian dollar makes imported goods more expensive, which can feed into inflation. It also affects the returns on US investments held by Canadian investors, as currency fluctuations can either boost or erode gains.
UBS's outlook suggests that investors should brace for potential volatility in the loonie, but not necessarily a sharp sell-off. The bank's forecast of USD/CAD staying around 1.39-1.40 implies a relatively contained range, which could offer some stability for those with cross-border exposure.
In the broader context, the tariff dispute is part of a larger pattern of trade tensions that have been affecting global markets. Similar dynamics have been seen in other currencies, such as the South African rand, which has been navigating its own set of economic pressures. Investors are also keeping an eye on the US dollar's overall strength, as seen in recent moves ahead of key economic data releases.
Looking ahead
The key question for the loonie is how long the trade dispute lasts and whether it escalates further. UBS's view is that the currency has enough support to avoid a major decline, but the risk of near-term weakness remains. Traders will be watching for any signs of de-escalation or further retaliation, as well as economic data that could influence the Bank of Canada's policy decisions.
For now, the Canadian dollar appears to be finding its footing, but the path forward is uncertain. Investors should stay informed and consider how currency movements might affect their holdings, especially if they have exposure to US markets or commodities.
