The loonie may be Trump’s next target

The loonie may be Trump’s next target

The loonie may be Trump’s next target China, Japan, and Germany have recently been targeted by US President Donald Trump and US administration officials, who accused them of devaluing their currencies to gain an edge in trade. Market spectators are left wondering which country’s next – and it just might be Canada.

William Cline, a senior fellow at the Peterson Institute for International Economics (PIIE) in Washington, has shortlisted Canada, Mexico, and South Korea as the next potential candidates for such currency-based criticism, according to the Financial Post.

“Who else would be on the list — in the first instance, the larger countries that matter more to our trade,” Cline said, explaining the reasoning behind his picks. “I don’t think most economists would agree that they’re cheating, but that’s the conclusion that these kinds of attacks would imply.”

Cline authored a PIIE study examining the valuations of different currencies around the world. Conducted in November, Cline’s study showed the greenback to be 7.9% overvalued, which he attributes to the US economic recovery that’s outpacing its peers’ revivals. The loonie was overvalued by 0.3%, as was the euro, which Germany currently adopts, by 0.8%. In the east, China’s yuan is 0.7% above fair value, the Japanese yen is undervalued by 3.3%, and the Korean won is 6% below its fair value.

In the last five weeks, a fall in the US dollar has effectively eroded more than half of the gains it’s experienced since Trump’s November election win.

“This is a complete wipe-the-slate clean approach,” said PGIM fixed-income money manager Robert Tipp. “We don’t know if, on the trade front, this is going to be an opening gambit to renegotiate, or if this is the opening gambit in what’s going to be a destructive trade war. Obviously, no one’s playing to lose.”

For his part, Ulrich Leuchtmann, head of currency strategy at Commerzbank in Frankfurt, is convinced of an impending dogfight. “Buckle up for a currency war that might become nasty,” he said in a note, warning that competitive devaluation “would cause heavy collateral damage in terms of world GDP growth, international trade and financial stability.”

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