The loonie is shaping up as an early casualty of U.S. president-elect Donald Trump’s latest trade threats against Canada, with knock-on impacts expected elsewhere in Canadian pocketbooks.
The value of the Canadian dollar dropped by nearly a full cent to a four-and-a-half-year low of 70.53 cents to the U.S. greenback late Monday in the wake of Trump issuing renewed threats via social media for 25 per cent tariffs on all imports from Canada and Mexico.
The loonie regained some value through the morning on Tuesday, rising back above 71-cent mark before noon.
Despite a rally late last week, the Canadian dollar has largely faltered against its American counterpart since the U.S. election earlier this month.
Much of that weakness has been tied to promises Trump made during the campaign to levy blanket tariffs against other nations and install other protectionist, America-first policies — moves that encourage investors to pile into the U.S. dollar, hurting other currencies.
The Canadian dollar is also affected by the differential between the policy rates of the Bank of Canada and the U.S. Federal Reserve, with a wider gap hurting the loonie. Signs that Canada’s central bank may rein in the pace of interest rate cuts helped to fuel the loonie’s short-lived rally last week.
A weaker Canadian dollar makes imports to the country more expensive, which risks reigniting inflation that has cooled in recent months.
RSM Canada economist Tu Nguyen says that while Canada exports a lot of raw materials in the form of energy and materials, the country imports finished goods like vehicles. A weaker loonie can be good for exporters but drive up costs for the end consumer, in other words.
“Where that could potentially benefit is for Canadian companies that export because the exports are now seen as cheaper. But for Canadian consumers, we expect to see just higher prices of these items overall,” Nguyen tells Global News.
The impact of the sagging loonie is already being felt at the grocery store, BMO senior economist Sal Guatieri told Global News last week.
Canada is set to import more fresh food from the U.S. as the winter approaches, which Guatieri said means Canadians can expect to pay more as the looming Trump presidency keeps the loonie “on the defensive.”
What does this mean for inflation and the Bank of Canada?
Annual inflation returned to the Bank of Canada’s two per cent target in October, but Nguyen argues the market forces affecting the loonie could risk some of the progress taming prices.
While she says there’s still a lot of downward pressure on inflation in Canada — still-high interest rates are restricting economic growth and consumer confidence has yet to rebound — there’s now a renewed chance of price pressures reigniting.
“With the threat of tariffs and the weaker Canadian dollars, that might undo the disinflationary forces and we might see inflation potentially going a little bit higher,” she says.
Tariffs and a stronger-than-anticipated growth agenda under a second Trump presidency also threaten to push inflation higher south of the border, which Nguyen says can affect the U.S. Federal Reserve’s interest rate path. While the Bank of Canada and the Fed set rates independently, she argues that Canadian monetary policymakers will look to their U.S. counterparts to avoid diverging too much.
All of this complicates future decisions for the Bank of Canada, which has delivered four consecutive interest rate cuts to relieve some pressure on the Canadian economy. Nguyen believes the central bank is still on track to deliver another rate cut in December, but future movements are “uncertain.”
—With files from Global News’ Anne Gaviola