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CANADA: CIBC On USDCAD In Tariff Scenarios

CANADA
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  • Working off a BoC study from Jul 2019, which shows a 25% sweeping tariff could be worth around 6% of Canadian real GDP, CIBC estimate that the BoC’s overnight rate could fall as low as 0.8% with 2Y yields at 1.65% and USDCAD at 1.5340.
  • This is a hypothetical scenario. “Implementation hurdles, negotiation, and the high risk of retaliation in this scenario makes it little feasible that a trade war will get that far”.
  • They estimate that USDCAD currently has 2.3% of Trump premium.
  • Considering alternate scenarios, complete elimination of tariff risk would see USDCAD “move strictly off our Bank and our Fed call (CIBC Economics BoC: 4x 25bps cuts every meeting until June; Fed: H1 hold, 3x 25bps cuts in H2). In this case, USD/CAD hovers between 1.43-1.44 in H1 on continued headline uncertainty, before falling to 1.3750 in the back half of the year due to more aggressive Fed cuts in H2.”
  • Alternatively, they run scenarios with 10% tariffs and 20% tariffs with both energy & auto carve-outs as well as just energy carve-outs. Against these scenarios, they see USDCAD peaking at 1.461 and 1.468 in the 10% case or 1.478 and 1.496 in the 20% case.
  • “The market implied probability of spot moving above 1.4610 by Q2 is just over 20%; above 1.4960 is just over 10%. This implies that while high-stake tariffs are not expected to be the base case, the market has assigned a larger-than-zero chance that they can happen.”
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  • Working off a BoC study from Jul 2019, which shows a 25% sweeping tariff could be worth around 6% of Canadian real GDP, CIBC estimate that the BoC’s overnight rate could fall as low as 0.8% with 2Y yields at 1.65% and USDCAD at 1.5340.
  • This is a hypothetical scenario. “Implementation hurdles, negotiation, and the high risk of retaliation in this scenario makes it little feasible that a trade war will get that far”.
  • They estimate that USDCAD currently has 2.3% of Trump premium.
  • Considering alternate scenarios, complete elimination of tariff risk would see USDCAD “move strictly off our Bank and our Fed call (CIBC Economics BoC: 4x 25bps cuts every meeting until June; Fed: H1 hold, 3x 25bps cuts in H2). In this case, USD/CAD hovers between 1.43-1.44 in H1 on continued headline uncertainty, before falling to 1.3750 in the back half of the year due to more aggressive Fed cuts in H2.”
  • Alternatively, they run scenarios with 10% tariffs and 20% tariffs with both energy & auto carve-outs as well as just energy carve-outs. Against these scenarios, they see USDCAD peaking at 1.461 and 1.468 in the 10% case or 1.478 and 1.496 in the 20% case.
  • “The market implied probability of spot moving above 1.4610 by Q2 is just over 20%; above 1.4960 is just over 10%. This implies that while high-stake tariffs are not expected to be the base case, the market has assigned a larger-than-zero chance that they can happen.”