Canadian Dollar: Trade conflict weighs on Loonie – Commerzbank

Commerzbank’s Michael Pfister says the latest breakdown in US–Canada trade talks and Ottawa’s planned retaliatory tariffs point to a potentially protracted trade conflict. He argues that Canada appears increasingly unwilling to give in to new US demands, a stance that could weigh on Canadian sentiment indicators and undermine the recent tentative recovery in the short term. However, with political pressure building in the US ahead of the mid-term elections, Canada’s tougher negotiating position could still prove beneficial over the longer term.

Protracted tariffs and sentiment hit

"Negotiations with the US have been rather volatile over the past year or so, with last-minute breakdowns and disappointments becoming the norm. As if to confirm this, negotiations in North America also broke down over the weekend (for the time being). Both sides have, of course, blamed each other, although it is difficult to pinpoint the exact trigger. Apparently, it was due to new demands introduced at short notice that the other side found unacceptable."

"Ultimately, however, it is irrelevant to the Canadian dollar on which specific points the negotiations broke down. What was more decisive was the reaction of the Canadian Prime Minister. In response to the new US tariffs that have now come into force, he announced retaliatory tariffs due to come into force on 8 September (although the US has, of course, announced a response to this)."

" It appears that the Canadian side has braced itself for a protracted conflict, with reports suggesting that de-escalation is not expected before the mid-term elections, although one can never be certain when it comes to negotiations with the US."

"It seems the Canadian government believes that if they give in, they will simply be faced with an endless stream of new demands. For now, the matter has been put to rest."

"If so, however, the coming months are likely to paint a familiar picture: in the short term, Canadian sentiment indicators will probably slump again, thereby undermining the recent tentative upturn. Given the US President’s unpopularity in Canada and the approaching mid-term elections, this approach could still be beneficial in the long term."