What’s up with the Canadian dollar?
Relations between Canada and the United States have broken down to levels not seen since the dark days of January 2025, yet the currency remains “surprisingly resilient.”
The dollar has dipped since trade talks collapsed last weekend, falling about half a percentage point to around 72 U.S. cents this morning.
But it’s a far cry from early in 2025 when U.S. President Donald Trump slapped Canada with sweeping 25 per cent tariffs and our currency plunged to multi-year lows.
Back then the loonie sunk as low as 68.96 U.S. cents.
“In stark contrast to previous U.S. tariff hikes, volatility in the Canadian dollar has thus far been remarkably low,” said Mirza Baig, foreign exchange strategist at Desjardins.
“Is this a sign of resilience or is the market being complacent?”
Over the past week, Trump has imposed 50-per-cent tariffs on $28-billion worth of Canadian goods ranging from honey to hockey sticks. He also threatened to impose equally steep duties on Canada’s auto industry starting in January.
Yet the loonie is down less than 1 per cent against the U.S. dollar and just 0.4 per cent lower on a trade weighted basis since talks broke down, said Baig.
The explanation according to the strategist is that globally currencies are not reacting to Trump’s “tariff noise” the same way as they did early in the president’s term.
“Market participants have learned that tariff announcements are often just part of the negotiation process rather than the end result,” he said.
Baig uses the example of the euro during negotiations for a European Union-U.S. trade deal in which Trump repeatedly threatened the eurozone with tariffs.
“The euro shrugged it off. Similarly for CAD, flat option risk reversals suggest investors aren’t rushing to buy puts,” he said.
The bigger picture has also helped support Canada’s currency.
The U.S. Treasury’s surprise increase in bond buybacks to support the market put pressure on the U.S. dollar, though that has eased.
The loonie isn’t out of the woods yet, said Baig. The currency has become more sensitive to interest rate differentials and right now the gap between Canada and the U.S. is gaping.
The Bank of Canada’s rate going into this Wednesday’s meeting stands at 2.25 per cent, while the Federal Reserve rate is at 3.50 per cent to 3.75 per cent.
A higher Fed rate weakens the Canadian dollar as capital tends to seek out higher returns.
Baig said markets are no longer predicting the Bank of Canada will hike rates this year, but are still pricing in three 25 basis point increases in 2027.
Meanwhile, the central bank is left balancing the risks of higher inflation against the blow to the economy from Trump’s trade war.
“Communications surrounding the Bank of Canada’s rate decision could be a major test for the currency,” he said.
So stay tuned.
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U.S. President Donald Trump’s threat to slap 50 per cent tariffs on Canada’s auto industry on Jan. 1 would have a bigger impact on exports than the latest round of levies affecting $28- billion worth of goods, say economists.
The auto tariffs slotted for the beginning of 2027 include medium- and heavy-duty trucks which were one of the bones of contention that led to the breakdown of trade talks last week.
Why are they so important? Ford’s Oakville plant is being retooled to build medium-duty trucks exclusively and the new tariffs could “significantly undermine the project’s economics,” said Erik Johnson, senior economist at BMO Capital Markets.
General Motors Co.’s Oshawa plant that produces the Silverado HD would face the same predicament.
Auto exports accounts for about 7.6 per cent of what Canada send to the U.S. and auto parts another 4.4 per cent — a much larger share than the 5 per cent of exports hit by the tariffs imposed last Saturday, said Johnson.
- Today’s data: Canada current account balance
- Earnings: Royal Bank of Canada, Toronto Dominion Bank, CIBC, Best Buy Co. Inc., Dollar General Corp., Dollar Tree Inc.
- Canada’s counterpunch: What’s inside the government’s tariff and stimulus packages?
- Using energy as weapon in trade war should be a ‘non-starter,’ Alberta premier says
- Inheritance disputes are on the rise as cost-of-living pressures climb
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff and Bloomberg.
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Posthaste: Why Trump's tariff pressure isn't crushing the Canadian dollar
2026-08-27 12:00:03
