Canadian dollar investors nervously eye U.S. border tax threat

Fri Feb 17, 2017 2:46pm EST
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By Fergal Smith

TORONTO (Reuters) - The recent strengthening of the Canadian dollar belies the threat of a proposed U.S. border adjustment tax that could slam the currency due to Canada's heavy reliance on exports to its southern neighbor, forex strategists and fund mangers say.

The loonie, as the Canadian currency is called, would be among the biggest losers if the Trump administration implements a border tax as part of its effort to crack down on what it sees as unfair competition from trading partners, analysts say.

They expect such a move would reduce the competitiveness of Canada's exports as well as pressure the prices of its key commodities, such as oil, through a stronger U.S. dollar. Canada sends 75 percent of its exports to the United States.

The result could be a sharp drop in the Canadian currency, which is already down nearly 20 percent against the U.S. dollar since the summer of 2014, when oil prices peaked.

"The risk of that potential border tax adjustment I don't think is fully priced in," said Hosen Marjaee, senior managing director and portfolio manager at Manulife Asset Management.

The Canadian dollar has gained 1.5 percent against its U.S. counterpart since Donald Trump won the Nov. 8 presidential election, the best performance among the currencies of the G10 countries.

The Canadian dollar would need to fall 10 percent if the border tax is introduced to offset the negative impact on the competitiveness of Canadian exports, said Ian Gordon, FX strategist at Bank of America Merrill Lynch.

"Listening to the dialogue in Washington, the president and a lot of his advisers seem to be coming around more to the idea (of a border tax) than they were even a month ago," Gordon said.   Continued...

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch