The Canadian dollar slumped to its weakest level in more than a year on Tuesday after the Trump administration said it would levy a new tariff on Canadian timber exports, the latest chapter in a long-running trade dispute.
President Donald Trump surprised investors late Monday by announcing to a group of reporters that his administration planned on levying a 20% tariff on Canadian soft-lumber exports.
But while the loonie sunk on the news, shares of Canadian lumber exporters actually rallied as some investors had expected an even larger tariff.
Commerce Secretary Wilbur Ross said Tuesday during an interview with CNBC that the tariff shows that Trump is serious about enforcing trade rules, though he assured investors that this isn’t the beginning of a trade war with Canada. Ross explained that certain Canadian provinces are disadvantaging U.S.-based lumber producers by allowing local loggers to cut down trees at reduced rates and sell them at lower prices, and that negotiations to rectify this were unsuccessful.
The U.S. currency
advanced to $1.3614 on the news—its highest level since February 2016. It traded at C$1.3504 late Monday in New York.
Trump over the past week or so has stepped up his criticism of Canada’s trade policies. Last week, he promised to defend American dairy farmers who have been hurt by Canadian protectionism. On Tuesday, he attacked Canada’s import tax on ultra-filtered milk.
Still, with negotiations on the North American Free Trade Agreement looming, the news appeared to catch currency traders off guard.
“The fact that he did announce these tariffs ahead of Nafta negotiations is catching the market by surprise,” said Bipan Rai, a macro strategist at CIBC Capital Markets.
Disputes between the U.S. and Canada over lumber-related trade are nothing new, Rai said. But it appears that “protectionism wasn’t priced into the U.S. dollar-Canadian dollar currency pair and we’re starting to see the ramifications of that.”
Meanwhile, shares of lumber companies Canfor Corp.
and West Fraser Timber Co. Ltd.
climbed more than 6% on the news. Shares of Finning International Inc., a distributor of Caterpillar Inc.
products, also rose.
Their advances suggests that “perhaps the tariff isn’t as high as some people might’ve been fearing,” said Colin Cieszynski, chief markets strategist at CMC Markets.
After having risen more than 20% since the beginning of the year in anticipation of a tariff, lumber futures retreated on Monday and Tuesday, with the May contract
off 2.5% in recent trade.
“We don’t have a price target, but expect lumber to recover and continue a bullish trajectory,” said Lara Magnusen, portfolio manager and strategist at Altegris Advisors.
—Myra Picache contributed reporting