Canadian Dollar Leads on Tariff Relief

File image of President Donald Trump. Official White House Photo by Shealah Craighead.

The Canadian Dollar rallied amidst signs Donald Trump won't rush into hiking imports on Canadian goods.

Foreign exchange markets sprung into life on Monday after a news article said Trump plans to issue a broad memorandum Monday that, "directs federal agencies to study trade policies and evaluate U.S. trade relationships with China and America’s continental neighbours."

"USD/CAD is down more than 1%, its largest decline since 2023, as the Canadian dollar reflects the collective sigh of relief that Canada won't be exposed to tariffs from day 1 of Trump’s second term," says Kathleen Brooks, research director at XTB.

The commitment to "study" and "evaluate" trade relationships suggests tariffs might not be an issue for his first week in office. Previously, investors were pricing an approximate 65% chance tariffs on China and Mexico would be announced, with a 45% chance Canada would also be targetted.

It suggests a more nuanced approach to the issue that would ultimately better outcomes for the likes of CAD and MXN.

"The sharp moves in the FX market on the back of the delay to Trump’s tariffs is a sign that the President’s second term could trigger excess volatility in financial markets. The markets had been prepped for tariffs for some time, this is why the CAD had fallen more than 3% vs. the USD since Trump won last year’s election," says Brooks.

Reports suggest Trump might execute 100 executive orders on day one, but "conspicuous by their absence are actual tariffs, which suggests that a programme of tariffs is still under debate by Trump and his team," says Brooks.

Instead, the president will oversee a barrage of executive orders focussed on domestic issues.

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The Dollar is sharply lower across the board in a decline that confirms markets saw a real risk of tariff announcements, widely held to be inflationary and pro-Dollar.

Previously, Trump had said he would target Mexico and Canada with tariffs because he was unhappy about the flow of illegal migrants and drugs across the U.S. border.

It confirms he sees tariffs as a tactical tool to coerce countries into aligning with his wishes.

This implies that countries like Canada can work towards less damaging tariff regimes than initially feared.

Looking ahead, we would expect the current FX moves to be a relief-style reaction as opposed to genuine trend change as tariffs are still coming, and the CAD may be yet disappointed in the future.