The Canadian dollar gained some relief after the US announced a three-day delay to the 50% tariffs on certain Canadian goods that were due to take effect on Wednesday, according to Commerzbank Research in a note.
The postponement announced by President Donald Trump late Tuesday comes as an agreement has reportedly been reached between the US and Canada, with additional time needed to finalize the details.
However, the loonie's muted reaction suggests markets remain cautious over whether the deal will ultimately be finalized and what form it will take, wrote Commerzbank FX Analyst Michael Pfister in the Wednesday note.
Even if a deal is reached, its durability will be key, added Pfister. Despite approving the United States-Mexico-Canada Agreement, or USMCA, on trade during his first presidential term, Trump has repeatedly criticized the pact in recent months, raising doubts over the longevity of any new accord.
For the Canadian dollar to recover more strongly, the new agreement will need to provide lasting certainty and avoid renewed challenges, according to Commerzbank.