07:51 AM EST, 02/05/2025 (MT Newswires) -- Markets settled down on Tuesday after the United States tariff-related volatility to start the week, said Bank of Montreal (BMO).

Equities bounced back modestly, although many corners of the TSX that were hit hard on Monday didn't claw back all of their losses-risk on the trade front has been delayed, but not altogether removed, noted the bank.

Yields rallied further and the five-year Government of Canada is notably now at the lowest level since mid-2022, pointed out BMO. The Canadian dollar (CAD or loonie) caught major relief and quickly went from a 20-year low -- just above 67 US cents -- on Monday as the hours were counting down, to just shy of 70 US cents -- $1.429USD -- and the top end of the range seen since mid-December.

After the U.S. tariffs on Canada didn't go through, BMO set much of its forecast back to where it was on Friday -- but the disturbance to business confidence will linger. This tariff 'scare' is leaving a legacy.

It raises the risk of tariffs being used more often for objectives other than international trade policy, stated the bank. More importantly, it leaves BMO even more uneasy about what to expect on and after April 1.

By that date, there will be three reports delivered to President Donald Trump under the America First Trade Policy memorandum that should be full of tariff recommendations backed by formal investigations, or soon-to-be). This should set the stage for more 'Section 232' (national security) and 'Section 301' (unfair trade practices) tariffs. More profoundly, they will probably make the case for a 'global supplementary tariff'. Will Canada be shielded from such in a renegotiated USMCA, asked BMO. There is lots of uncertainty.

In turn, the bank's new base case has slightly weaker Canadian growth than the original at 1.7% versus 1.9% for 2025, a slightly weaker loonie now staying above C$1.40 all year, and meaningfully more downside risk to its Bank of Canada call of 50bps worth of rate cuts by this summer.

What the latest episode has taught BMO is that even with signed legal documents and hard deadlines, this is still a fluid situation. Consequently, this is unlikely to be the bank's last forecast alteration.

Canada's international merchandise trade data for December will be published at 8:30 a.m. ET Wednesday.

Canada's merchandise trade deficit likely held at a modest C$300 million in December, added BMO as a weaker Canadian dollar likely boosted the value of USD-denominated imports and exports, while a positive manufacturing flash supports imports and non-energy exports.

Still, front-running ahead of tariffs likely overwhelmed more fundamental drivers of trade. The bank judges the threat of across-the-board tariffs on Canadian exports to the U.S., combined with expectations for more targeted retaliation on Canadian imports, will support the trade balance on net. This impact is likely to persist until tariffs are implemented or their possibility eventually dissipates.