Trump's Currency War Hit List - Is Canada a Target?

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Published : February 17th, 2017
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Category : Editorials

A lot has been said about the potential for a US-Canada trade war. And judging from a lot of what’s happened, especially with respect to a strengthen USD, it looks like currencies may be what could light the spark to the barrel of gunpowder.

THE BACKDROP

The fact of the matter is that a strong dollar isn’t necessarily good for all sectors of the U.S economy. A strengthening dollar can have a “deleterious feedback loop” for export-oriented companies, since it means their products are now more expensive for foreign customers to buy. The net effect is that US-based manufacturers could suffer tremendously – including in terms of having to cut jobs and downsize their operations.

Another sour pill to swallow for Team Trump, if the USD continues to rise against major currencies, is the fact that foreign corporations, such as German pharmaceutical giant Bayer or Euro aerospace behemoth Airbus that do significant business in the U.S, profit more than U.S corporations selling overseas.   

And that’s exactly contrary to the platform of ‘Buy America”, job creation and boosting exports that Mr. Trump ran on during his campaign. So when a country’s currency weakens, in relation to the USD (i.e. the Greenback grows comparatively stronger), the war hawks in the Trump administration sit up and take notice!

WAR CLOUDS GATHER

Since November 2016, the PowerShares DB US Dollar Index (UUP), which tracks the USD against a basket of world currencies, has been on a steady increase, from $25.59 (Nov 11, 2016) to a high of $26.70 (Dec 20th, 2016). Granted that some of those gains have been paired back by Mr. Trumps jawboning statements ($25.89 at the time of writing); but it still represents a nearly 4.8% rise over a 6-month period ($24.71 on Aug 15, 2016).

Back on the campaign trail, Mr. Trump had already started beating the war drums. However, his war cries were largely directed towards China, and to his neighbour to the South – Mexico. But the battle cries keep getting louder. More recently, Trump senior trade advisors have levied similar accusations against Germany, and have also been severely critical about the Japanese currency “malpractices”. 

CANADA IN TRUMP’s CROSSHAIRS?

Things could get messy for Canada’s economy, if the same rhetoric is applied to the US dollar’s performance versus the Canadian dollar. Back in November, the USD traded at $1.34 per CAD, with “Trump Talk” pushing it up in strength to $1.36 (Dec 27, 2016). At the time of writing, the Greenback has lost some steam, trading at $1.31 per CAD – roughly just about where it traded 6 months ago.

So what will a stronger USD mean for the Canadian economy, if the Trump Administration decides to label Canada a “Currency manipulator”? What could a currency war with the US mean for Canada?

Well, the US is Canada’s largest trading partner, and any strengthening of the Greenback against the Loonie is positive for Canadian exporters, but negative for the US – since it tilts the balance of trade. Mr. Trump may therefore do all he can to ensure the dollar does not gain too much strength versus the CAD. One way to retaliate might be to target specific Canadian industries, like Energy, Forestry and Auto. 

In terms of specific impacts to Canadian economy, New Brunswick, Alberta and Ontario will be the worst three provinces to be hit by any currency war fallout; that’s according to TD Economics analysis. These three provinces have exports that are significantly exposed to the US, and any retaliatory measures by the US, such as a border tax, will have deleterious effect on provincial economies.

With respect to specific industries that could become casualties of any currency-initiated trade war between the two neighbours, based on TD Economics figures (Share of total goods exported to the US), it is likely that Auto Parts, Regulatory Consultants, Consumer goods and Forestry products will be the hardest hit.

SILVER LINING?

Searching for a sliver of sunlight peeking out of the dark currency war clouds, Trump advisors have assured Canada that, should trade and currency be up for discussions and renegotiations, then Canada may have nothing to be worried about from the new administration. However, as has been the hallmark of the new occupant at the Whitehouse, what’s said (or promised) and what’s actually delivered might be two entirely different things.

Brace for it…the USD-CAD currency wars might just be about to begin!

Data and Statistics for these countries : Canada | China | Georgia | Germany | Mexico | All
Gold and Silver Prices for these countries : Canada | China | Georgia | Germany | Mexico | All
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Graham Summers is Chief Market Strategist for Phoenix Capital Investment Research, an independent financial research firm based in Charlottesville VA with clients in 56 countries around the world.
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