The Canadian dollar climbed above 70 cents U.S. early Wednesday with the immediate threat of a trade war on hold for the next month.

The loonie plunged below 68 cents U.S. for the first time since 2003 early in the week as the possibility of U.S. President Donald Trump’s 25-per-cent tariffs loomed over the Canadian economy. After speaking with Prime Minister Justin Trudeau Monday Trump said he would delay the levies for 30 days until March 1.

In the wake of the reprieve, the Canadian dollar rose 3.5 per cent, with the gains reversing more than half of its losses since tariff fears first emerged in late November.

Trump first floated the threat of 25 per cent tariffs on Canadian and Mexican goods on his Truth Social platform on Nov. 25. Before that, the loonie was trading at around 71.5 cents U.S.

Some think the tariff axe will never fall.

“We can safely say this tariff file overhanging Canada and Mexico is going to fade away,” David Rosenberg, founder of Rosenberg Research and Associates Inc., said in a note on Tuesday “The 30-day reprieve is a joke. Trump is not raising tariffs and probably was never going to.”

Canada “has been spared a deep recession.”

But that doesn’t mean the loonie is out of the woods, said economists.

CIBC Capital Markets expects the Canadian dollar to hit 71.2 cents U.S. in the “very near-term, but that strength could be short-lived, said Sarah Ying, CIBC’s head of FX strategy, in a note Wednesday.

A higher loonie would become a target for short-sellers, said Rosenberg.

Canada’s economy continues to underperform the United States with the Bank of Canada forecasting it will operate in a state of “excess supply” — where more is being produced than consumed — into next year.

Canada’s central bank cut its interest rate to three per cent last week, while the U.S. Federal Reserve held at 4.25 per cent to 4.5 per cent.

The 150-basis-point spread separating the two lending rates will benefit the U.S. dollar as investors continue to pour money into the U.S. to take advantage of higher interest rates.

Ying said it’s unusual for the Canadian dollar to appreciate when the market is betting on further Bank of Canada rate cuts, “but it is clear that the market is not ready to trade the fundamentals just yet.”

Markets are currently forecasting a Bank of Canada terminal rate of 2.35 per cent, down from 2.75 per cent two weeks ago, she said.

Watch for more volatility before the next tariff deadline on March 1.

“This whole (tariff) episode is a reminder that we are going to be in a constant state of uncertainty,” said Rosenberg.

• Email: gmvsuhanic@postmedia.com

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