How will the loonie rate be changed due to the potential US tariffs?

Geopolitical tensions and recent Trump’s remarks have made Canada find itself at a crossroads as its largest trading partner has proposed new tariffs on Canadian imports. At the same time, Canada warms its ties with China after years of strained diplomatic relations. These developments will profoundly impact the loonie rate, meaning the USD/CAD and other CAD pairs will be affected heavily. The Canadian dollar is often called a loonie by experienced currency traders. Let’s analyze how the loonie may be impacted by the U.S. tariff threats and how it might impact the loonie rates. 

Background on U.S.-Canada trade relations

The CAD or loonie is a popular trading currency for currency day traders, and knowing how it might get affected by the U.S. tariffs can be critical. To properly analyze and use the information for trading, traders need to know broader FX trading concepts. FX trading for beginners involves fundamental analysis, which means analyzing the currency’s background and important macroeconomic events to define potential scenarios and currency rates. The two countries share one of the largest trading partnerships in the world, meaning that the changes in U.S. and Canadian policies have a profound effect on the USD/CAD currency pair. According to Statistics Canada, over 75% of Canadian exports go to the U.S., making Canada extremely sensitive to American trade policies, especially tariffs. In 2024, Washington proposed the steel and aluminium tariffs, including additional duties on Canadian automotive and agricultural products. As a response, USD/CAD major currency pairs have been moving upwards, meaning that CAD was depreciating against the dollar. It almost reached the 1.48 price level and then started the correction. This move has been followed by criticism from Canadian officials who fear it could destabilize an already fragile supply chain, and the country might introduce retaliatory tariffs. Canada views these tariffs as a step back from the cooperation the two countries have established over the years. 

Economic impact on Canada

The economic impact of these tariffs can be significant. Canada’s GDP could shrink by up to 3.25%, as some sources indicate, if the U.S. tariffs are imposed. Such developments can lead to rising unemployment, slower investment growth, and declining business confidence. As a result, we might see a depreciating loonie against other major currencies, especially the USD and the EUR. As Canadian Manufacturers & Exporters (CME) revealed in a survey, over 63% of manufacturers would be forced to delay capital investments, and 41% might consider layoffs if tariffs increase production costs. This would affect both the Canadian economy and the CAD currency negatively. The housing market and consumer goods sectors might also feel indirect effects of these tariffs as material costs rise and income declines. 

Implications for the CAD

During periods of economic uncertainty and contraction, countries’ currencies experience weakness and depreciate. The same is true for the loonie, which has been affected by USA tariffs. As these tariffs affect economic growth and business sentiment, the Bank of Canada might come under pressure to cut interest rates and stimulate the economy by making loans cheaper. Lower interest rates equal higher inflation and weaker currency, which can reduce the attractiveness of the CAD for foreign investors seeking higher yields. When it comes to USD/CAD, traders and investors also closely monitor what the U.S. Federal Reserve might do. If the Fed continues to hold interest rates unchanged while the Bank of Canada cuts rates, the interest rate differential would widen, and the USD/CAD exchange rate would respond by going higher, which means a weaker loonie. 

Broader economic impact and China-Canada relations

As we have discussed, the U.S. situation presents downside risks for the loonie, but Canada’s gradual improvements in relations with China could be a potential counterbalance. As two countries resumed high-level talks about trade, green energy cooperation, and academic partnerships, analysts suggest that even limited progress in this area can have profound effects on Canada’s trade portfolio and reduce its reliance on the U.S., making its tariffs obsolete. 

China remains Canada’s second-largest trading partner. Increased exports to China can provide a new income stream for Canadian businesses, potentially strengthening the loonie in the medium to long term.