Canadian Dollar Performance
The Canadian dollar, also known as the Loonie, regained much of its earlier losses against the U.S. dollar on February 3, 2025. Investors showed cautious optimism regarding a potential reprieve from U.S. tariffs, which contributed to the rebound from a 22-year low.
The currency traded 0.5% lower at 1.4590 against the U.S. dollar, or 68.54 U.S. cents, after dipping as low as 1.4793—its weakest level since April 2003.
Tariff Concerns and Market Reactions
President Donald Trump temporarily suspended new tariffs on Mexico for one month, following Mexico’s commitment to send 10,000 National Guard members to control illegal drug flows. The Canadian dollar and other currencies like the Mexican peso and the euro strengthened in response to the possibility of similar tariff relief for Canada.
Despite this, Canadian officials are not hopeful for the same treatment as Mexico, as Canadian tariffs remain set to take effect on Tuesday, February 5. Prime Minister Justin Trudeau has also vowed to implement 25% tariffs on $155 billion of U.S. goods if the tariffs on Canada are enforced.
Economic Impact and Market Expectations
The Bank of Canada recently warned that an escalating tariff war could severely harm the nation’s economy. This prompted a 25 basis point interest rate cut to 3%.
Economists are now predicting an 80% chance of another rate cut by the central bank in March. In addition, Canadian manufacturing activity showed slower growth in January as the threat of U.S. tariffs dampened business confidence. Despite this, there was a slight increase in export orders, marking the first growth in 17 months.
Canadian Bond Yields
Canadian bond yields also saw a decline, with the 10-year yield dropping 13.6 basis points to 2.929% after hitting a low of 2.879% earlier, the lowest since September 18.
This market movement highlights the growing uncertainty surrounding Canada’s economic outlook as the nation braces for potential trade disruptions.
Key Highlights:
- Canadian dollar rebounds from a 22-year low.
- Tariffs on Canada poised to take effect, while the U.S. temporarily pauses tariffs on Mexico.
- Market anticipates possible tariff reprieve for Canada.
- Bank of Canada cuts interest rates and signals further easing.
- Canadian bond yields fall across the curve, with the 10-year yield touching its lowest since September.
