US President Donald Trump had been talking about placing tariffs on Canadian timber and dairy forever; however no announcement (if any) was expected until next week. But overnight Trump unexpectedly imposed a tariff of up to 24% on Canadian wood exports. This seems to be a response to Canada’s long-standing taxes on US daily imports, which the Trump administration views as unfair.
The trade dispute escalations highlight simmering discontent regarding NAFTA and it meant the FX markets were quick to target CAD and MXN. With Trump nearing his first 100 days with little of the “winning” promised, he will be quick to score cheap points with his core political base. Renewal of protectionist sentiment will likely upset upcoming NAFTA renegotiations, keeping NAFTA FX trades under selling pressure. In addition, the focus on dairy prices will highlight NZD issues.
Markets had been lulled into a false sense of security after Trump's retreating from harsh China rhetoric and broader legislative failures. However, this policy action is a clear illustration of the ease in which he can enact punitive trade policy. CAD came under significant selling pressure as news of the action hit the wires. We remain constructive on USDCAD, which has rallied above its falling trend line for December, targeting a range high at 1.3600.
By Peter Rosenstreich