Canadian Dollar Forecast: USD/CAD Driven by Trump Tariff Timing

Canadian Dollar, USD/CAD Talking Points:

• President Trump took another step back on implementing tariffs this week as it now appears that reciprocal tariffs will be applied on April 1^st, allowing for ample time to negotiate. The announcement came along with a notable move of USD-weakness, even after a strong set of U.S. inflation prints this week, and this seems to illustrate the market calling a bluff on Trump tariffs.
• After holding support for more than a week around 1.4300 in USD/CAD the reciprocal tariff announcement on Thursday drove a larger pullback in the pair, and this appears driven by the thought that Trump may not actually want to implement tariffs and, instead, use the prospect of tariffs as a negotiation tool.
• While the saga isn’t quite over for Canada yet as the next March 1^st deadline remains, both monthly and weekly charts for USD/CAD are looking more and more attractive for broader-based mean reversion.
• Canadian CPI comes out next Wednesday and I’ll be looking at USD/CAD along with several other USD pairs in next Tuesday’s webinar: Click here to register.

Supports can’t hold forever, and we saw that on display in USD/CAD this week. The 1.4300 level had become a familiar spot in the pair as the support zone around it held the lows for four of the past five weeks. But, as I warned a week ago, bears had been persistent, and there could be growing motivation for buyers to close positions and that exposed the next support down at the 1.4200 handle.

Perhaps ironically that bearish move in the US Dollar and in-turn USD/CAD took place after the announcement of reciprocal tariffs. But it wasn’t the tariff announcement itself that drove the flow, as much as the timing, and even before the announcement news had spread that the White House was looking to implement those tariffs on April 1^st.

This would echo something that showed around the U.S. and Canadian tariff stand-off, where a deal was ultimately reached to delay tariff implementation and the takeaway was that the U.S. side didn’t seem all too motivated to actually implement tariffs but, rather, wanted to use them as a negotiation tool, of some sort. To be sure, the prospect of tariffs actually being implemented came along with both U.S. Dollar strength and U.S. equity weakness, while news of delaying tariffs came with the opposite, showing USD weakness and strength in stocks. Ultimately that seems like a preferable scenario to President Trump who has often referenced equity market performance as a barometer if his administration’s success and given the lack of actual tariffs being implemented thus far, the continued delayed timing has been a driving factor to the tariff threat getting priced-out of a number of markets, USD/CAD included.

At this point USD/CAD is still elevated on a longer-term basis and we can’t rule out another recurrence of Trump talking about Canadian tariffs. But, also like I said last week, given the March 1^st deadline from the prior delay, it would appear that there’s time before that becomes an issue again in the pair, so motivation can remain for bulls to take profit and this puts the focus on deeper support levels in the pair. The 1.4200 level has already been traded through, and the next major level lower is the 1.4100 level, which is both a minor psychological level and a Fibonacci level as taken from the 2016-2022 major move. And then the 1.4000 level below that is a major psychological level and this was the price that the pair couldn’t test during the multi-year range, which finally broke in November as Trump started to tout the prospect of Canadian tariffs.

USD/CAD Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

Trump Tariff Consequences

With U.S. inflation remaining elevated the big question around Trump tariffs would be impact, especially for Canada. As Canada exports a lot of energy to the United States, and the U.S. uses that energy to transport goods and services across the continental 48 states, any additional tariffs on Canada could serve to boost inflation on a broad range of products that are shipped across the country.

Speaking to the desire to implement tariffs, even when the Trump administration was saying that tariffs would be implemented on February 1^st, there were several unanswered questions, including whether energy would be included or whether there would be a carve-out. But even if there is an exception, there’s a risk of retaliation from the Canadian side as it’s unlikely that Canada wouldn’t respond in some way, and likely a way to increase the pressure of negotiations and a primary pressure point for the U.S. side would be energy.

With that said, markets still cannot completely rule out the prospect and this is something that could keep continued bearish trends as somewhat contained, at least until larger signs of resolution are apparent.

From the monthly chart, the range that’s been in-place for the past nine years still very much remains in-play, and this highlights why that 1.4000 level is so important. Once sellers can finally establish bearish trends below that level, the door will open for a move back towards 1.3500 and possibly even 1.3000. But, until then there’s still an open door for bulls to make a run, particularly if Trump has any surprises regarding tariff timing for Canada. At this point, however, it looks like that would be an opportunity to set up a lower-high.

Given the prior support around 1.4300 that would be an ideal area for bears to defend in that scenario, but given how quickly prices have come off this week, even 1.4200 might be able to stand in as such.

USD/CAD Monthly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD Shorter-Term

At this point there’s a fast near-term sell-off to work with and looking at next week’s economic calendar, it’s Canadian CPI next Wednesday that stands out.

Given recent CAD-weakness, we could see an upper push on inflation, which could similarly be a driver of CAD-strength and that could further drive the sell-off in the pair. This is what could potentially expose the 1.4000 level as support.

On the other side of the pair, the tariff threat remains, and we can’t rule out Trump commenting on the matter even though the deadline has been pushed back to March 1^st. He said on Thursday that tariffs on autos were coming and that would apply on top of reciprocal tariffs, and he could similarly bring the Canadian tariff topic back in the headlines with a simple social media remark or comment to the press.

But, in this case, that would seem to be an opportunity to set a lower-high on a short-term basis, and this brings to the table that 1.4300 level of prior support as possible resistance.

USD/CAD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist