In a surprising market turnaround, the Canadian dollar (CAD/USD) has bounced back from a near three-week low against its U.S. counterpart, driven by investor reactions to disappointing U.S. economic data and rumors of potential intervention by U.S. lawmakers regarding tariffs on Canadian goods.

On Tuesday, the loonie traded 0.4% higher at 1.4325 per U.S. dollar, translating to approximately 69.81 U.S. cents. This recovery follows a moment earlier in the day when it hit its lowest intraday level since March 14, at 1.4415.

The backdrop of this rally comes as U.S. President Joe Biden is poised to outline a significant agenda for reciprocal tariffs. Previously, Trump had threatened, but ultimately delayed, implementing a hefty 25% duty on many Canadian imports—this move linked to demands for Canada to assist in curbing the influx of fentanyl into the U.S. market.

On Tuesday, Biden called upon his Republican allies in the Senate to oppose a rebuke of his tariff policies, which are connected to the fentanyl crisis he declared in relation to Canada. However, a report from the Globe and Mail suggested that certain Republican senators might be inclined to support the rebuke, causing a ripple effect in the currency markets and offering a lifeline to the Canadian dollar, as noted by Shaun Osborne, chief currency strategist at Scotiabank.

"This news has made the loonie one of the standout performers in the G10 currencies today,” Osborne remarked.

Meanwhile, U.S. manufacturing revealed troubling trends for March, contracting after two months of growth, while factory gate inflation skyrocketed to its highest point in nearly three years, raising concerns about the repercussions of proposed tariffs on imported goods.

On the Canadian side, manufacturing data is also showing signs of strain. Economic indicators revealed a sharp contraction in Canadian manufacturing activities during March, marked by a notable drop in new orders—the steepest decline observed since the onset of the COVID-19 pandemic.

Additionally, Canadian bond yields have recorded a decline across the yield curve, with the 10-year yield falling by 2.4 basis points to settle at 2.945%. Earlier in the session, it even dipped to its lowest point since March 5, at 2.901%.

As the situation develops, market participants are watching closely for further announcements from U.S. lawmakers and the implications these will have on trade relations and currency markets. Stay tuned as we continue to monitor this evolving story!