The Canadian dollar won a slight reprieve on Monday after Donald Trump did not immediately impose tariffs on imports from Canada on his first day in office.

The loonie was up 1.25 per cent to 69.86 cents U.S. on Monday afternoon following the new president’s inauguration, but it had started creeping up earlier in the day on reports from the Wall Street Journal and The New York Times that Trump would not act right away on a threat he made almost two months ago in a social media post.

“My hunch is that today’s move just reflects a temporary reprieve from the threat,” Derek Holt, vice-president and head of capital markets economics at the Bank of Nova Scotia, said in an email. “We’re always going to be one Trump tweet away from much further CAD (Canadian dollar) weakness,” he said adding that the bank’s economic modelling suggests that a “full-blown tariff war” would push down the loonie to 62.5 cent U.S. range.

For the moment, Holt is estimating that there is “at least a nickel of tariff risk” in the Canadian dollar-U.S. dollar pairing. But there are other “drivers” including interest rate differentials, the diverging economic performance of the two countries and commodities.

Trump’s re-election has proven a bane for the Canadian dollar. Prior to Monday’s bounce, the loonie had fallen 4.5 per cent since Nov. 5, a decline attributed to both the tariff threat and the broader Trump trade, which includes tariffs and cuts to personal and corporate taxes.

On Friday, the Canadian dollar came within a whisker of falling below 69 cents U.S., its lowest level since March 2020.

Whether the currency can hang on to Monday’s gains remains to be seen.

“Although more nuanced messaging from the White House could trigger a global relief rally in the short run, risk-reward ratios in other currencies will remain skewed to the downside, limiting any appetite for directional bets against the greenback,” Karl Schamotta, chief market strategist at Corpay Inc., said in note prior to it becoming clear that the new president would not opt for 25 per cent tariffs — the most extreme option he had floated — on day one of the administration.

Schamotta warned, however, that “participants will remain unwilling to step in front of the dollar steamroller” and bet against it.

“Trump’s history suggests that no ‘moment of clarity’ is coming, meaning that uncertainty levels — particularly on the trade front — could remain near historic highs for many months yet, weakening global consumer sentiment, delaying business investment and raising implied volatility expectations in currency markets,” he said.

Holt at Scotiabank believes those in Canada and elsewhere who called for retaliatory tariffs against the U.S. have been proven correct, at least for the moment.

“The score is 1 for the retaliation camp, 0 for the pacifists who preached doing nothing against U.S. tariffs,” he said, suggesting the threat of retaliation may have given Trump pause. “I liken it to the first step in a long dance.”

• Email: gmvsuhanic@postmedia.com

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