Canadian Dollar Forecast: USD/CAD At Risk as Trump Tariff Date Nears

Canadian Dollar, USD/CAD Talking Points:

• Next week is the final full week of February and just like last month, there’s a deadline for Trump tariffs to come into play on a Saturday.
• In the prior episode pandemonium played out in USD/CAD after the weekly open in which tariffs were supposed to come into play. But a deal was reached to delay that tariff implementation until March 1^st. That has led to a sizable pullback in USD/CAD and the question now is whether tariffs will actually come into the picture or whether another delay or deal will be reached.
• The monthly bar in USD/CAD is a bearish engulfing candlestick but from the weekly, we can see a spot of support coming in to hold the lows this week. Next week’s performance will be big in the longer-term technical backdrop of the pair.

The U.S. Dollar looks like it could be on the verge of a larger reversal and, if so, I’m not sure that dynamics behind the Canadian Dollar could prevent USD/CAD from following that path. But – next week is big on that front as the topic that’s been pushing both the U.S. Dollar and USD/CAD – is very much at the forefront.

Canadian tariffs were one of the larger push-points in the post-election backdrop. President Trump started talking about this in late-November, with his initial statement saying that if Canada did not shore up the border for the transfer of migrants and drugs, a 25% tariff would be implemented on Canadian imports. This could have a profound effect on the Canadian economy and accordingly, USD/CAD jumped on the news with the pair setting a fresh four-year-high.

That theme continued to push through December and Trump refined the statement to say that tariffs would come into play on day one of his presidency. Sure enough, when we got to inauguration day, USD/CAD pushed a breakout and the day after led to the pair’s first test of the 1.4500 handle since the 2020 Covid pandemic. But as he pushed the date for tariffs back to February 1^st, the pair pulled back and held support around the same area that had previously been in-play, around the 1.4300 handle.

The February 1^st date is when the drama really began and it’s also what points to next week as being highly important. The date that tariffs were supposed to come into play fell on a Saturday, and on the Friday before, Reuters reported that the date had been pushed back to March 1^st. That led to a slide in USD/CAD but that move was short-lived, as the White House then refuted that report, and warned that tariffs were still set to come into effect on February 1^st.

I warned of pandemonium in USD/CAD as the next weekly open would be mired with confusion around tariffs and whether they would actually come into play. When we did finally get to the weekly open, prices jumped-higher, setting a fresh 20-plus year high before pulling back. And then, early in the U.S. session on that Monday, a truce was announced with the tariff date being pushed back to March 1^st – which is next Saturday.

USD/CAD Monthly Chart

From the monthly chart above it looks like mean-reversion remains in-play on USD/CAD. And this would illustrate what I’ve been talking about even since early-December when the tariff topic was starting to take over the pair’s price action.

Also speaking to this is the fact that the U.S. Dollar continues to show signs that a top may already be in-place, and as of this writing, the currency is testing below another key level of support on the way to fresh lower-lows.

If that theme does continue then USD/CAD would probably have a difficult time bucking the trend. But – it’s not all green pastures for bears at this point as another important date in the tariff discussion comes into play next Saturday.

At this point there remains confusion over tariff negotiations: When the last deal was announced, the Canadian side, or at least Trudeau, sounded more optimistic, pointing to a deal that Canada had announced to devote resources to shoring up the border with the United States. President Trump, however, sounded less finished, instead saying that he hoped that an economic deal could be reached.

In the time since, the tariff topic has continued to take the wind from Dollar bulls’ sails, as the reciprocal tariff announcement came along with an April 1^st implementation date and the net result of that, so far, has been another lower-low and lower-high. So, the question does remain as to whether Trump will push tariffs to come into play and if he does, that would be USD-positive and CAD-negative. But another delay could lead to even more profit taking from the longer-term bullish move, thereby exposing the 1.4000 level, which is a key spot in that longer-term range looked at above. This would also speak to the USD topping theme noted above (and discussed in this week’s webinar), along with the bigger picture range that’s held in USD/CAD for the past nine years.

USD/CAD Weekly Chart

USD/CAD Shorter-Term Strategy

While President Trump may not want to deal with the ramifications of tariffs, he also doesn’t want to look weak, nor does he want his threat of tariffs to go unacknowledged in other venues where the topic has come up. While Canada was the first focal point, along with Mexico, more recently he’s expanded the tariff discussion to include any country that has tariffs on the United States, and this comes with a particular focus on Europe.

With Canada, the risk can be vast as the United States imports a considerable amount of energy from their northern neighbor. And the U.S. is still very much reliant on fossil fuels to transport products across the country, meaning tariffs on energy could lead to a bump-higher with inflation across a broad range of products. At this stage, we don’t even know if tariffs would apply to energy, although Trump has commented in the past that there may be a carve-out. But, even if there is, Canada has the potential to retaliate with a tax of some sort that could further hit that pressure point.

As we saw last month, the tariff topic had a USD-positive and equity negative impact, and I’m not sure that this is something that President Trump wants to deal with as he often points to equity market performance as a barometer of his administration’s success.

But we have to call this what it is – utterly unpredictable – as it’s essentially a negotiation and next week could be a pensive outlay for both the U.S. Dollar and USD/CAD.

And regarding larger themes of USD-weakness, at this point, there seems to be other pairs that could be more attractive, at least for now. Again, that could change if we see another delay in the tariff topic for Canada as a likely factor helping to the pair from a steeper sell-off is the prospect of tariffs coming back into the picture for next week. If that gets kicked further out into the future, bulls have even less reason to hold on and defend support which could equate to the move below the 1.4000 handle.

Until then, the prospect of lower-high resistance remains. Near-term price action has held in a bullish channel over the past week, which takes on the appearance of a bear flag formation that’s based around the 1.4200 area. Overhead, it’s prior support from 1.4280-1.4303. Above that is another crucial area for the pair around the 1.4500 psychological level which, to this point, has only been traded above briefly.

For next support, the 1.4000 level is obvious but there’s also a Fibonacci level plotted just below 1.4100 that holds some interest, as well.

USD/CAD Four-Hour Price Chart

--- written by James Stanley, Senior Strategist