Canadian stocks and the loonie slipped this week as trade tensions with the US rose and as the market waited for the upcoming Bank of Canada (BoC) decisions. The TSX Composite Index crashed to C$24,248, its lowest level since November 5 last year. Similarly, the USD/CAD exchange rate rose to 1.4500.
Canadian stocks fall as trade war continues
The main reason why the TSX Composite index has crashed by over 6.25% from its highest point this year is the ongoing trade tensions with the United States.
Donald Trump has already added tariffs on most Canadian goods, and has hinted that he would add more in the future.
On Tuesday, Trump warned that he would double steel and aluminum tariffs from Canada and add more on their vehicles. He said that in response to the decision by Ontario to increase electricity prices for states like New York and Minnesota.
The tariff threat waned after Howard Lutnick said that he would negotiate with Canada on these issues. Ontario’s Doug Ford halted his plan to hike power prices in the US ahead of these talks.
Still, the TSX Composite, together with American indices like the Dow Jones, S&P 500, and Nasdaq 100 indices crashed because of these tariffs.
Why US and Canada tariffs matter
These tariffs are notable for three main reasons. First, they involve two of the biggest trading partners in the world. Canada is the biggest buyer of American goods, while the US us the largest buyer of Canadian goods. The two-way trade volume is over $1 trillion a year.
Second, the tariffs are notable because the two countries have a history of doing business without tariffs. This history started even before Bill Clinton signed the NAFTA trade agreement almost 30 years ago.
Third, the supply chains between the US and Canada are highly intertwined. For example, it is common for car engine parts to be made in the US and added to the vehicle in Canada. As such, these tariffs may lead to major supply chain shocks in the coming months.
Bank of Canada decision
The next key catalyst for the TSX Composite and the USD/CAD exchange rate will be the upcoming Bank of Canada decision on Wednesday.
Economists expect that the bank will decide to slash interest rates by 0.25% in this meeting. These odds explain why Canada’s bond yields have retreated, with the ten-year falling below 3% and the 30-year moving to 3.25%.
The bank will likely cut interest rates in a bid to support the economy that is facing a black swan event in terms of worsening trade relations with the biggest trading partner.
Lower interest rates benefit companies and consumers by ensuring that they have low borrowing costs.
Not all TSX companies have crashed during this crisis. Firms in the gold and silver mining industry like Aya Gold & Silver, First Majestic Silver, IamGold, New Gold, MAG Silver, and Fortuna Mining Corp soared by over 7% on Tuesday.
TSX Composite technical analysis
TSX Composite index chart by TradingView
The daily chart shows that the TSX Composite index has crashed in the past few weeks. This crash happened after it hit the crucial resistance level at C$25,833, where it has now formed a double-top pattern.
The TSX Composite index has crashed below the 50-day and 100-day moving averages. Also, the Relative Strength Index (RSI) and the MACD indicators have continued falling this year.
Therefore, the TSX index will likely have a strong bearish breakdown as sellers target the next key support at $23,000. Such a move would imply a 5% drop from the current level.
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