Canadian Dollar Forecast: USD/CAD Pandemonium on Trump Tariffs

USD/CAD, Canadian Dollar Talking Points

• With a few hours to go in the week and the month of January, it’s been a wild and chaotic ride in USD/CAD as the tariff topic has dominated the headlines.
• Initially, Trump said that tariffs would go into effect on ‘day one,’ which he walked back shortly after inauguration day and, instead, pointed to February 1^st.
• He pledged on Thursday that tariffs were set to come online this weekend, but a report on Friday indicated that the date would be pushed back to March 1^st, which brought a sizable retracement to USD/CAD. That report was then refuted by the White House a couple hours later, saying that tariffs were, in fact, scheduled to come into play on the originally revised deadline of February 1^st.
• This is a fluid topic and there will likely be more twists and turns ahead, which can continue to stoke volatility across markets. USD/CAD could be vulnerable to chaotic swings on Sunday based on how the tariff theme develops over the weekend, and traders should exercise caution with the pair.

Indices AD

Markets are getting a warm reminder of market volatility under President Trump, when a simple social media comment or a remark to the press could cause a swell of buying or selling; and that showed on both sides in USD/CAD over the past week which extends a topic that’s been getting headlines for a couple of months.

At this point, there’s quite a bit that’s still uncertain and given the February 1^st deadline being on a Saturday, this could have a large impact on markets on the Sunday open, USD/CAD included. So traders should exercise caution in the pair as this remains a very fluid situation that could change quickly; but from the past week and, bigger picture, over the past two months, a couple of key drives have been clear. Tariffs at this point have tended towards U.S. Dollar strength and Canadian Dollar weakness, with strength showing in the USD/CAD pair. A delay in tariffs or any thought of tariffs not coming into play has shown the opposite, with USD/CAD weakness.

On a shorter-term basis we can see this dynamic in action in both directions over the past couple weeks. Trump had previously said that tariffs on Canada would come into effect on ‘day one’ of his administration. So, the day after he was inaugurated, USD/CAD spiked above 1.4500, albeit temporarily. President Trump then pointed to February 1^st as the date for tariffs to begin and USD/CAD continued to pullback until 1.4300 came into play, at which point buyers came into show support.

The next week-and-a-half was largely higher-lows, as buyers continued to build in the expectation for tariffs to begin on February 1^st, and then on Thursday (January 30^th), when President Trump indicated that tariffs were, in fact, coming online on Saturday, USD/CAD tested another breakout to a fresh four-year-high.

That breakout pared back later on Thursday and price continued to hover around 1.4500. But then a report hit on Friday indicating that Trump’s administration would again delay tariffs on Canada, and a larger pullback showed with the pair pushing below the 1.4400 handle.

It was a couple hours after that when the White House walked back that report, saying that the Reuters report of delaying until March 1^st was incorrect.

USD/CAD then jumped again to test above the 1.4500 level. This is some chaotic volatility late in the session on Friday, and I’ve added a box around the gyration that began on Thursday to illustrate just how erratic those moves have been. But – perhaps more importantly – given the generally low levels of liquidity that will show on a Sunday open combined with the fact that this very fluid situation will likely remain in the headlines, this could make for a very volatile open in the USD/CAD pair.

USD/CAD Hourly Price Chart

Canadian Tariffs: What’s Known, What Isn’t?

Perhaps the lack of details is what drove the Friday report that tariffs would be delayed, but at this point, there’s a lot left to be announced. What we do know is that the White House stated that 25% tariffs will be levied on imports from Canada and Mexico, and 10% tariffs on goods from China. White House press secretary Karoline Leavitt said that more details would be available on Saturday, while also making the statement, ‘these are promises made and promises kept by the president,’ which seems to indicate that the White House will not be backing down.

There’s also the question as to whether there will be a carve out for energy imports to the United States, as tariffs on oil could provide more push on inflation given the U.S. dependency on crude oil for transporting products across the continental 48 states.

And then there’s the question of retaliation, as Trudeau warned that Canada would respond to tariffs. To this point, threats from Canadian politicians ranging from Trudeau to candidate and former BoE Governor Mark Carney to the premier of Ontario, Doug Ford, have generally been met with more Canadian Dollar weakness, highlighting the fact that a larger trade war between the two countries could equation to even higher prices in USD/CAD.

There's also been the pledge of 'pandemic-level support' for workers in Canada should the U.S. impose tariffs. This would likely spell even more Canadian Dollar weakness as debt would probably be required to accomplish that initiative. And this could further drive USD/CAD topside breakouts. 

And, on a bigger picture basis, that CAD-weakness could be even more troublesome for the Canadian economy as it pushes-higher on inflation, even as the Bank of Canada has been cutting rates as they did again last week.

So, this is a tenuous situation and President Trump certainly seems to think he’s holding the Trump card, pun intended, which has allowed for him to push the tariff topic closer and closer to reality.

From a strategy perspective, this can make for a dangerous backdrop for chasing breakouts, as there’s been several false breakouts that have appeared. However, for those exercising patience and waiting for support with a higher-low to show, there could be more attraction, such as we’ve seen since the initial breakout on the tariff topic, which then led to a pullback and support at the 1.4000 handle.

USD/CAD Daily Chart

USD/CAD Bigger Picture

While the trend on the daily has been clear and running higher, longer-term there’s still the possibility of mean reversion, and price is getting closer and closer to a key juncture on the chart.

In 2020, the swing high came in at 1.4668, just 22 pips inside of the 2015 high of 1.4690. As I’ve been writing about for the past few months, that area marks the top-end of the range that’s held in USD/CAD and until bulls force a decisive move beyond that price, the possibility of mean-reversion remains.

From the monthly chart below bulls have remained in firm control ever since support at 1.3500 in September, and the January candle is shaping up to be bullish, as well. But the big question here on a longer-term basis if whether we see some form of pivot this month and given the hot button nature of the tariff topic, something like that would certainly seem possible. But, likely, we would need to see politicians on both sides of the matter move towards some element of resolution which, at this point, seems a distant prospect.

Until then, the next major resistance sitting overhead is clear at the 1.4690, above which the pair would push up to fresh 20-plus year highs.

USD/CAD Monthly Price Chart

--- written by James Stanley, Senior Strategist