By Michael O’Neill
Canada and the USA have been friends for a long time, almost as long as Canada has been a country. The Treaty of Ghent in 1814 formally ended the War of 1812, which led to the Reciprocity Treaty of 1854. That was the start of economic cooperation, including reduced tariffs and trade in natural resources.
As time passed, love blossomed. Factors like shared values, geographic proximity, and mutual economic dependence helped both countries transform from neighbors to allies. By the early 20th century, their bond was solidified through cooperation in global conflicts, joint infrastructure projects, and a commitment to peaceful coexistence along the world’s longest undefended border.
Alas, familiarity breeds contempt—even Aesop wrote about it in The Fox and the Lion. President Trump certainly feels that way. Soon-to-be-former Prime Minister Trudeau incurred Trump’s wrath after Canada hosted a G-7 summit in 2018. In a post-meeting press conference, Trudeau boasted about standing up to Trump. Donald was not amused and tweeted, “PM Justin Trudeau of Canada acted so meek and mild during our G7meetings, only to give a news conference after I left saying that, ‘US Tariffs were kind of insulting’ and he ‘will not be pushed around.’ Very dishonest & weak.”
Trudeau got Trump’s dander up again when he was caught on a “hot mic” talking about Trump having a 40-minute press conference and being late to a reception at Buckingham Palace. Trump called him “two-faced.” “Trump’s personal disdain for Trudeau isn’t just a war of words; it’s spilling over into policy decisions that could have significant economic consequences for Canada.”
President Trump never lets the facts get in the way of a good rant. He claims that the United States is subsidizing Canada to the tune of $100 billion/year while Canada floods America with illegals-both drugs and immigrants. In reality, Canada only has a $25 billion trade deficit with the U.S. And it is illegal US drugs and illegal US guns that are crossing the border. Furthermore, the U.S. relies on $100 billion worth of oil and gas imports and over half of the minerals critical to its steel production.
It stands to reason that the tariff threat is Trump’s way of reopening the United States-Mexico-Canada Agreement on trade, which is not scheduled for review until 2026. Trump is a big fan of using leverage in negotiations, and the threat of a 25% tariff is a pretty big stick.
Canada and the U.S. have a “Friends with Benefits” relationship, but lately, one friend seems to be taking liberties, leaving the other feeling used and abused.
Divorce Hurts the Kids the Most
If President Trump follows through on his tariff plan, Canadians are going to suffer. The price of groceries would go up because Canada imports 57% from south of the border. Beyond the immediate price hikes, the ripple effects of tariffs could put Canada’s monetary policy under pressure, forcing the Bank of Canada into some tough decisions.”
Bank of Canada Juggling Knives
Canadian interest rates are widely expected to be cut by 25 bps to 3.00% on January 29 because until the US actually levies tariffs, it’s business as usual. The latest inflation report shows that CPI is a couple of ticks below the 2.0% target, while the Bank’s favourite measures, CPI-Trim and Median, are both well inside and below the top of the band. Policymakers really don’t have any choice. The economy is sluggish and barely above a recession, while unemployment continues to inch higher. It is now 6.7% compared to the 2022 low of 4.8%.
Canadians Juggling Politics
Prime Minister Trudeau prorogued Parliament and resigned, but unfortunately, his resignation is not effective until the Liberal Party elects a new leader on March 20. That will be quickly followed by a non-confidence vote. The earliest that an election can be held is 36 days from the date the government falls. That won’t be the case this time because the Liberals and NDP are woefully unprepared to face the voters. The Governor General determines the length of the election campaign but on the advice of the Prime Minister.
Loonie Treading Water
This political drama isn’t unfolding in isolation. The uncertainty surrounding Canada’s leadership has left its mark on the Canadian dollar, which is now caught in the crossfire. USDCAD has been trending higher since September in the wake of widening Canada and US interest rate differentials, which have reached their widest levels in over seven years. The Trudeau government’s “woke” agenda was described by the Fraser Institute as favoring virtue-signaling, ill-conceived policies that ignore the enormous economic costs to Canadians. It was no secret to foreign investors, who have stayed away in droves. Economic growth has stalled, and unemployment is rising.
The USDCAD technical picture is even uglier. It has a strong bullish trend that suggests a break above 1.4450 will extend gains to 1.5050 if Trump’s 25% tariff threat becomes reality on February 1.
This ‘Not So Crazy in Love’ story is bound to end in tears with both side crying fowl.
