The Vulnerability of the Canadian Dollar Amid U.S.-Mexico Tariff Tensions

The Canadian dollar is underperforming against the Mexican peso since Trump’s inauguration. Analysts cite Canada’s greater vulnerability to tariffs as a reason for the loonie’s downturn. In contrast, Mexico maintains a more favorable negotiating position with the U.S., likely influencing currency stability. Recent developments indicate potential tariff exemptions for Mexico and ongoing challenges for the Canadian dollar under new leadership.

The Canadian dollar is underperforming compared to the Mexican peso amidst ongoing tariff tensions stemming from Donald Trump’s administration. Since Trump’s inauguration, the loonie has depreciated by 0.5 percent against the U.S. dollar while the peso has appreciated by 3.5 percent. Among 16 major currencies, the Canadian dollar ranks second to last in returns, illustrating a significant shift in market perception.

Analysts attribute this divergence in currency performance to various factors. Nick Rees, head of macro research at Monex Europe Ltd., noted that the Canadian economy is more exposed to tariff risks, making the loonie more vulnerable. In contrast, Mexico’s government can negotiate concessions with the U.S., which could limit negative impacts on its currency.

Newly-elected Liberal Party leader Mark Carney, who will assume the role of Prime Minister, has adopted a confrontational stance regarding tariffs, asserting that retaliatory measures against the U.S. will remain until Canada receives “respect.” Meanwhile, Mexico’s President Claudia Sheinbaum has taken a more reserved approach, focusing on negotiation rather than retaliation.

Reports from U.S. Commerce Secretary Howard Lutnick highlighted Mexico’s measured responses to tariffs compared to Canada’s more aggressive stance. Analysts at JPMorgan Chase noted that Mexico has demonstrated more effective communication with the U.S., indicating potential for preferable tariff arrangements.

Moreover, JPMorgan’s analysis suggests that Mexico may secure exemptions in the auto sector and contend with limited reciprocal tariffs if VAT exclusions are considered. The bank is optimistic about Mexico’s position, anticipating potential agreements to limit its imports from China and thus help its negotiating stance.

Derek Holt from the Bank of Nova Scotia noted that while Mexico’s currency had previously experienced a downturn for domestic reasons, the current economic climate has left the Canadian dollar weaker. CIBC Capital Markets’ Sarah Ying further indicated that the market anticipates rate cuts from the Bank of Canada amid rising tariff uncertainty, compounding pressure on the loonie.

In summary, the Canadian dollar faces significant challenges compared to the Mexican peso due to the differing economic responses to U.S. tariff pressures. Mexico’s ability to negotiate concessions may provide it with a more robust position, thus mitigating the peso’s vulnerability in international markets. Canada’s more reactive approach to tariffs under its new leadership could exacerbate the loonie’s challenges in the face of ongoing economic negotiations.

Original Source: financialpost.com