USD/CAD Forecast: The Canadian Dollar Points to a New Bullish Bias

USD/CAD has declined more than 3% over the past three sessions, with movements favoring the Canadian dollar. Currently, the price remains well below the last high at 1.4793, which was reached amid the turmoil caused by the tariffs the White House intended to impose on Canada. However, the bearish movement has gained strength in the market, driven by agreements reached between both governments in the short term and the continued weakness of the U.S. dollar.

Agreements Reached

In response to the initial threat of imposing 25% tariffs on Canadian products, Prime Minister Justin Trudeau’s government announced retaliatory measures, imposing an equivalent 25% tariff on goods imported from the United States, valued at approximately 155 billion Canadian dollars. Additionally, the Minister of Foreign Affairs stated that Canada would not remain passive in the face of Trump’s trade policies, suggesting that the country was prepared to impose further countermeasures if necessary.

Shortly after this escalation, Prime Minister Trudeau announced that, following a conversation with Trump, they had successfully postponed the tariff implementation for 30 days. In exchange, Canada committed to: Controlling the trafficking of fentanyl, ensuring 24/7 border surveillance and launching a joint task force to combat organized crime along the border.

Furthermore, an intelligence directive was signed, with an investment of 200 million Canadian dollars, to ensure these commitments are upheld.

The swift agreement between both governments came as a positive surprise to the market, strengthening the Canadian dollar and triggering a significant bearish correction in USD/CAD. As negotiations progress and reduce the risk of new tariffs, the bullish pressure on the Canadian dollar could increase in the short term.

The Role of the U.S. Dollar

Initially, the U.S. dollar saw a strong bullish reaction following the White House’s tariff threats. However, the DXY Index, which measures the strength of the U.S. dollar, has declined by more than 2% in the last three sessions, reflecting market sentiment that these threats may be more of a negotiation tactic rather than an actual intention to implement trade sanctions.

DXY Index Daily Chart

Source: TVC, Tradingview

Uncertainty surrounding the tariffs has gradually diminished as agreements are reached, and the U.S. dollar continues to maintain a short-term bearish bias. If these conditions persist, the weakness of the greenback could further support the Canadian dollar, prolonging the downward pressure on USD/CAD.

USD/CAD Technical Outlook

Source: StoneX, Tradingview

• Trend Break: The uptrend line that began in September 2024 experienced a significant break in the last session due to the current bearish move in USD/CAD. At present, the price is approaching a new key support zone. If selling pressure continues, a stronger bearish move could develop, breaking the current sideways range in the chart.

   

• RSI: The RSI line maintains a downward slope and recently crossed below the 50 level, indicating a dominance of bearish pressure. If the RSI line continues to move away from this level, it could confirm a stronger bearish bias in the short term.

   

• ADX: The ADX line has remained consistently above the 20 level, suggesting that the current bearish movements are trending. As long as this indicator remains at these levels, it could signal the beginning of a new downtrend.

   

  Key Levels:

   

• 1.44469: Near-term resistance, located at the top of the sideways range. If the price reaches this level again, it could shift the chart’s outlook and restore importance to the neutral range in the short term.

   

• 1.43202: Current support, corresponding to the lower boundary of the sideways range and aligning with the 50-period moving average. If the price remains below this level, bearish pressure could intensify, leading to a breakdown of the sideways channel.
  
  

• 1.42056: Key long-term support, aligned with neutral levels recorded in recent months. If the price drops to this level, selling pressure could increase, paving the way for a new medium-term downtrend.

Written by Julian Pineda, CFA – Market Analyst