By Michael O’Neill

Big game hunting season has ended, but not for the Loonie. That season officially opens on January 20th, when the 47th (formerly 45th) President of the USA, Donald Trump, levies a 25% tariff on all imports from Canada. Bet on it.

Alberta Premier Danielle Smith met with Trump in Florida last weekend. Her province ships around 4.2 million barrels of heavy crude every day, and many U.S. refineries, especially in regions like the Midwest, which are specifically configured to process heavy crude oil. Canadian Western Canadian Select (WCS), is essential for these refineries, and it has the added benefit of being $12.15 per barrel cheaper than West Texas Intermediate.

Trump is well aware of the contribution of Canadian oil; he just doesn’t care and apparently said as much to Ms. Smith. She returned home with a stark warning—Canada needs “to be prepared.”

Lose , Lose But Not Equally.

 A trade war would inflict widespread harm on both Canada and the U.S by disrupting trade, increasing consumer prices, and eroding economic growth. But Canada would suffer more. Imagine two pedestrians crossing a road: one is clipped by a woman in a wheelchair (U.S.), and the other is flattened by a speeding gravel truck pulling a trailer (Canada).

America may have some issues, but they are nothing compared to what is happening in the Great White North. The U.S. will have a functioning government on January 20. Not Canada. The Governor General has prorogued Parliament, leaving the Liberals scrambling to find a leader who won’t drive them into “non-official” party status. So, who will deal with Trump and his new trade policies?

The provincial premiers have stepped up to the plate, and they are united in one thing: all of them want another province to bear the brunt of counter-tariffs, leaving business as usual for their own districts. Ontario flatly rejects imposing tariffs on auto or auto parts exports, Québec shields its forestry, electrical and aluminum industries. However, all the premiers except Alberta’s Danielle Smith are eager to apply sanctions on crude oil exports, effectively shifting the impact to Alberta.

Over 75% of Canadian trade relies on the U.S. Tariffs would decimate the auto, agricultural, and energy sectors, fueling job losses and driving up inflation.

Government Grows, Private Sector Slows

Canada is flirting with a recession after nine years of a government with hostile business policies and a misguided push to transition from a resource-based economy to a green fantasyland. Foreign investment has evaporated, there are massive housing shortages, along with a broken immigration policy, and a as of January 3, a leadership void.

It’s not all bad—Canada has added 162,000 jobs since October. Unfortunately, nearly 42% of the jobs are in the public sector, increasing deficits, taxes, and inefficiency. The job growth pattern is more alarming when compared to the U.S., where only 23% of the jobs created between October and December were in the public sector. This disparity helps explain why Canada’s economy is barely treading water while the U.S. economy is chugging along.

Its Not all Peaches and Cream in Trumpland

There are troubling signs for the U.S. economy. Wage growth is starting to slow, and the latest bump in interest rates points to consumers channeling more of their earnings into mortgage costs. Treasury yields are off their peak levels but remain elevated. A trade war will not be good for equities, which are a tad vulnerable. That’s partly because price-to-earnings (P/E) ratios for the S&P 500, in particular, sit at 29x—a historically elevated level. These stretched valuations leave little room for error, but fortunately, JPMorgan Chase and Goldman Sachs earnings beat estimates.

Trump’s promise to levy 25% tariffs on Mexican imports, plus another 10% on imports from all other countries, is a real can of worms. Quite simply, that tactic will raise prices for American consumers, which is inflationary, and CPI remains sticky. Can you say rate hike? Fed Chair Jerome Powell certainly can, and he won’t shy away from a rate bump if inflation rises.

The King is Coming

As the clock ticks down to Donald Trump’s inauguration, FX and equity markets are showing signs of treading water. Investors appear hesitant to make bold moves, reflecting a “wait-and-see” approach.

What will Donny do? How much of his campaign rhetoric will translate into policy? He promised sweeping tax cuts, deregulation, and infrastructure spending but was rather vague on the specifics.

Those worries extend around the globe. Trump has directly or indirectly led to the fall of governments in France, Germany, and Canada. China has ramped up stimulus spending and front-loaded a record volume of exports in December to get around the new tariff plan.

For Canadians, one thing is certain—Tariffman can’t wait to act.

U.S. hunters have the Loonie in the crosshairs. A 25% surcharge on Canadian products brought into the U.S. may not be an extinction event for the Loonie, but it will certainly hit the flock hard. If so, USDCAD will likely hit 1.5500 if Trump puts his words into actions.