With recession fears looming, what comes next for the loonie?

As stock markets and commodities like oil ride a trade war roller coaster, the Canadian dollar has been inching back up after a dip and hitting as high as 71 near the end of the trading day on Wednesday.

Can it last?

The Canadian dollar has been reacting to the dips and shocks of the stock market chaos brought on by U.S. President Donald Trump’s trade war.

World shares slumped on Wednesday after Trump’s latest tariff hikes took effect, and he threatened to add still more. Uncertainty is running high about what Trump will do next in his trade war, and the European Union unveiled that bloc’s retaliation plans set to hit next week.

Let’s dive into what’s behind the loon’s strength right now, and what it means for the Canadian economy.

The value of the Canadian dollar has been somewhat low at about 70 cents USD, but it has slowly been inching back up, gaining nearly a full cent at one point Wednesday.

This comes as stock markets roil and commodities like oil hit a four-year low over the U.S. global tariffs, and the loonie, while not immune to changes, has so far managed to tread water in the storm.

With the future anything but certain, what do the economic headwinds mean for average Canadians who want to get the most bang for their buck?

Well, like many economic components, there are a lot of contributing factors to where the loonie goes.

In a sense, Canadians are seeing a slight bounce for our dollar because of how it stacks up with other currencies — namely, the U.S. dollar.

Because of the weak outlook, American investors may look more to north of the border when considering where to invest their money amid the turbulence.

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“The tariff exemption for goods that comply with the USMCA trade agreement between the United States, Mexico and Canada has helped the loonie outperform some major peers in recent days,” said Mirza Baig, a foreign exchange strategist at Desjardins speaking in an interview.

“Repatriation flows from Canadian investors may also have helped stabilize the Canadian dollar,” Baig said.

Although Trump’s trade war is expected to negatively affect Canada’s economy overall, it may not be as bad as places like the European Union and especially China because of the North American trade deal that was negotiated by the U.S. president during his first term.

Canada also avoided the latest round of “reciprocal” tariffs last week.

“Canada escaped being named in the Trump administration’s latest round of tariff increases,” says senior market strategist at Corpay Karl Schamotta. “Although we’re still getting hit with a substantial increase in trade duties, we’re not likely to hurt as badly as some other countries.”

The Canadian dollar may not be getting hit has badly from the trade war as other currencies, but the economic outlook is dim with experts pricing in a recession this year — especially in the United States.

Karl notes, “The U.S. dollar is falling as investors lower their growth expectations for the American economy … money is moving out of the United States and into other areas of the world.”

Investors are also looking outside of the United States more now that there is so much volatility, as well as weakness in the U.S. dollar, and many may be looking to buy Canadian currency while it’s priced low.

In the past, a stronger loonie might have encouraged more Canadians to travel south of the border to take advantage of the better exchange rate, but these tariffs have left a sour note for many leading to less travel to the United States.

Canadian businesses are also going to have a tough time adapting to minimize the impact of these tariffs — even if the loonie gains in strength.

“Asian countries have been disproportionately targeted by the Trump administration’s tariffs, and as a result, this will impact U.S. retailers who source their goods from these countries,” says the Retail Council of Canada.

“The knock-on effect of the tariffs on consumer confidence, inflation, the U.S. economy, and the Canadian economy will remain a challenge for Canadian retailers to navigate for weeks and months to come.”

To put it simply: a strong loonie may benefit the Canadian economy, but with so many moving parts and a great deal of economic uncertainty it can be hard to know whether the loon flies, floats, or dives as the trade war rages on.

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