Canadian dollar edges higher as Canada announces retaliatory tariffs

The Canadian dollar edged higher against its U.S. counterpart on Tuesday and bond yields fell as investors weighed the latest escalation in the trade war between the U.S. and Canada, including its impact on the Bank of Canada policy outlook.

The loonie CAD= was trading 0.1% higher at 1.3835 per U.S. dollar, or 74.21 U.S. cents, recouping a small part of Monday's decline that was spurred by the failure of the U.S. and Canada to reach a trade deal that would have averted a 50% tariff on some Canadian goods.

• Canada hit back on Tuesday with retaliatory tariffs on U.S. annual imports worth about $20 billion and rolled out aid for businesses and workers, matching Washington's latest duties dollar-for-dollar.
• "The escalation in the trade war will be difficult for the Bank of Canada to navigate," Royce Mendes, head of macro strategy at Desjardins, said in a note.
• "Although the net effect on economic growth will clearly be negative, the combination of retaliatory tariffs and persistently elevated oil prices means that central bankers will be reticent to offer up monetary stimulus," Mendes said.
• The swap market continues to expect the next move by the BoC to be a hike, pricing in a roughly 40% chance by year end.
• Since the start of the month, the loonie has gained 1.3% as data pointed to a pick-up in the domestic economy and the U.S. dollar .DXY posted broad-based declines.
• The price of oil, one of Canada's major exports, fell as traders shrugged off the latest U.S. sanctions campaign against Iran, viewing economic pressure as posing less risk to oil supplies than a military escalation. U.S. crude oil futures CLc1 were trading 3.3% lower at $82.19 a barrel.
• Canadian bond yields moved lower across the curve. The 10-year CA10YT=RR was down 3.8 basis points at 3.646%, extending its pullback from a two-year high on Friday at 3.770%.