The Canadian dollar and Mexican peso found themselves under pressure late Thursday after President Donald Trump announced 25% tariffs on goods from Canada and Mexico, effective Saturday, February 1, 2025. This unexpected decision caused significant volatility in the foreign exchange markets, with the USD/CAD rate spiking to nearly 5-year highs.
Trump’s tariff announcement, which he claims is aimed at curbing illegal immigration and smuggling, particularly of fentanyl, sent shockwaves through trading circles. "We may or may not impose tariffs on Canadian and Mexican oil," Trump stated during a press session on Thursday, leaving traders uncertain about the future. The uncertainty surrounding oil imports compounded market apprehensions, especially as oil prices play a pivotal role within the tariff framework.
The immediate aftermath of Trump's comments saw the USD soar against the CAD, pushing USD/CAD near the psychologically significant level of 1.4500. Analysts observed this rally as the Canadian dollar fell sharply across the board, dipping to levels not seen since early 2020. With the Canadian dollar under continuous pressure, the CAD/JPY pair also dropped, marking its third consecutive day of decline.
At the heart of the turmoil is the Bank of Canada’s recent decision to cut interest rates, reflecting concerns over economic growth amid rising inflation—which is now compounded by the looming tariffs. Analysts note, “the arrival of tariffs could mark the end of the BoC’s easing phase,” highlighting worries about the Canadian economy's resilience.
Trump’s tariffs are seen as potentially damaging for Canada, with the U.S. and Canada exchanging approximately $2.7 billion worth of goods and services daily as of 2023. A trade conflict stemming from these tariffs could lead to broader economic ramifications affecting jobs and businesses on both sides of the border.
Many market observers are now focused on how these tariffs will influence the Canadian economy, especially since the country heavily relies on oil exports. Recent fluctuations in oil prices have already put pressure on the CAD, with the upcoming tariffs likely to exacerbate this situation.
Traders are also concerned about how the divergence of monetary policies between the U.S. Federal Reserve and the Bank of Canada will play out. While the Fed has maintained steady rates, the BoC has started cutting rates to navigate economic challenges. Jerome Powell, the Fed Chair, mentioned there’s no rush to lower rates, which could strengthen the USD relative to the CAD.
Forecasts suggest, if the USD/CAD rate manages to maintain status above 1.4500, new highs not seen since early pandemic days might be on the horizon. Conversely, if it drops below 1.4270, it may signal relief for the beleaguered Canadian dollar. Investors are bracing for potential chaos as the U.S. economy adapts to new tariff policies, with many watching financial indicators closely.
Market sentiment remains cautious, with many trading houses warning of possible long-term consequences. Businesses, particularly those with supply chains reliant on cross-border trade, will be watching the developments closely as changes to tariff policies could reshape their operational forecasts.
This situation highlights the interconnected nature of U.S.-Canada trade: policymakers on both sides are grappling with how to adjust to external pressures. With President Trump reiteratively targeting tariffs as leverage points, the volatility of the USD/CAD exchange rate serves as both a signal and symptom of broader economic tensions looming on the horizon. The U.S. plan to impose flat tariffs could mark significant shifts—not only for currency traders but also for entire industries reliant on smooth cross-border trade.