What ramifications are there for Canada if U.S. President Donald Trump and Congressional Republicans get everything they want — tax cuts, infrastructure spending, and a border-adjustment tax?
According to a Deutsche Bank AG macro strategist, this trifecta of policies would force the Bank of Canada to cut rates and warn that quantitative easing might be needed to support the economy. The negative effect on exporters and competitiveness will likely dwarf any benefits stemming from the boost to U.S. aggregate demand.
On balance, the 20% tax on imports, the key tenet of a GOP proposal to which Trump has reportedly warmed, would allegedly depress Canadian exports by 8%.
And the Deutsche Bank expert argues Canada’s fiscal-policy levers to respond to protectionism might be more limited than many expect. The federal value-added tax — which functions in a similar manner to a border-adjustment tax — was already trimmed to 5% by Prime Minister Justin Trudeau’s predecessor, Stephen Harper.
Which leaves the Bank of Canada.
Monetary easing isn’t something that traders see in the cards. Overnight index swaps suggest markets are betting tightening is more likely than easing this year, with the odds of a cut peaking at just 3.5% for April’s meeting.
Indeed, the story in markets since the November election has been one of convergence, much to the chagrin of Bank of Canada Governor Stephen Poloz.
The governor cited Canada’s historically strong financial and economic links to its southern neighbour as the cause of the rises in the dollar and government bond yields, which have been highly correlated to their U.S. counterparts in recent months.
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