USD/CAD Outlook: Impact of Trump and Trudeau’s Tiff on Canadian Dollar under Tariffs
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The Danube River of possibilities for the Canadian Dollar (CAD) and the United States Dollar (USD) has been overflowing with energy and uncertainty lately. The recent developments surrounding possible tariffs and tension between President Trump and Prime Minister Trudeau have left many wondering what’s next for the USD/CAD pair. As a seasoned strategist, I’ll dive into the world of gurrencies and expose the drivers that will either propel the pair higher or keep it at bay.
The USD has recently set a fresh two-year high, while the USD/CAD has held its ground, albeit within the lower-high range from last week. Bulls have been hesitant to test the 1.4500 level, and for good reason. The introduction of possible tariffs on Canadian exports to the United States, touted by President Trump as a powerful tool to stimulate the U.S. economy, has left many economist’s heads spinning. The concept of tariffs is not a new one, but the current climate has taken center stage, especially with the rise of protectionism and tariff wars.
The Canadian Dollar matched its strongest daily outing against the U.S. Dollar in over a year this week, following news that Prime Minister Justin Trudeau was resigning from his post. The reaction to this news was swift, with prices spiking up to a fresh four-year high. While this news seems to be the main driver behind the surge in USD/CAD, it’s essential to remember that there are multiple factors at play here.
The introduction of possible tariffs on Canada is only one piece of the puzzle, and one that could have far-reaching consequences for both economies. The energy sector is a significant component of Canada’s economy, with a substantial portion of it being exported to the United States. Tariffs could lead to a surge in inflation, making it even more challenging for the Federal Reserve to achieve its inflation target. Trump’s economic agenda is built on promises of “America First,” but tariffs could stoke inflation, making it more complicated to achieve this goal.
Throughout history, President Trump has used social media to great effect in negotiations, from the infamous “Art of the Deal” to the more recent disagreements with Prime Minister Trudeau. Twitter has become a platform for him to voice his opinions and negotiate international deals. The acrimony between the two leaders has left many wondering if this will be a long-term problem for the pair.
The initial social media remark on the matter, when Trump initially suggested 25% tariffs on Mexico and Canada should the borders not be shored up for the spread of migrants and drugs, sent USD/CAD prices soaring to a fresh four-year high. This reaction wasn’t surprising, given the stakes involved. Buyers did pull back from the bid slightly, but they didn’t leave entirely, and that was around the time that support began to show at the 1.4000 psychological level. In December, buyers continued to push fresh highs, with a major move pricing in around the FOMC rate decision on the 18th and a follow-through high the day after.
Since then, highs have held inside that level at 1.4467. Bulls remain in control of the short-term move, but the longer-term picture is more complex. The pair has been in a range for nine-plus years, with the high established in 2015 at 1.4690. In 2020, price made a rapid run at this high but fell 22 pips shy of that level, with 1.4668 setting the 2020 high. These were the only two instances of price exceeding the 1.4000 level in the past decade-plus.
So, what’s next? The big item on the agenda for USD/CAD is the release of the Consumer Price Index (CPI) data on Wednesday, but for the pair, the commentary surrounding possible tariffs from the United States remains more pressing. As we wade into 2025, the question on everyone’s mind is what will bring more bulls to the table as the pair remains quite elevated on a longer-term, bigger picture basis.
The answer lies in the numbers, and the CPI data release on Wednesday will be a crucially important one. Markets have already priced in the FOMC rate cuts, but the inflation data remains a crucial variable. A strong reading could send USD/CAD surging higher, while a weak reading could trigger a pullback. At this point, I’m still considering this a market that bulls retain control of, even with the shorter-term instance of lower-highs looked at earlier.
The underside wick on the weekly bar further illustrates that, and this puts focus on the 1.4500 level and 1.4668-1.4690 zone. The recent Non-farm Payrolls print saw markets further price out FOMC rate cuts, and it’s the inflation data that will drive the narrative going forward. Will we see range continuation, or will the USD/CAD pair break out and challenge new highs? Only time will tell.
In conclusion, the USD/CAD pair is poised on the brink of a significant move, driven by the consequences of a protectionist era and the juggling acts from President Trump and Prime Minister Trudeau. As strategists, we must stay vigilant, studying the moves and the market’s reactions to the news. Whether you’re a seasoned investor or a newcomer to the world of currencies, it’s essential to understand the dynamics at play here. The stakes are high, and the outcome will be defined by the data and the reactions of the two leaders. Will you be an early adopter, or will you wait for the dust to settle? The choice is yours.
