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Summary
- USD/CAD has been on a roller coaster ride so far this month, peaking just below 1.4800 on 3 February, and troughing at 1.4150 on 14 February (both intraday).
- The pair now trades at ~1.4440, near the middle of its year-to-date (YTD) range.
- After a one-month deferral on 4 February, President Donald Trump says 25% tariffs on Canada will be imposed next week.
Market Implications
- We are wary of USD/CAD upside from current levels, given the likelihood tariffs will be enacted. However, Trump’s unpredictability means we wait and watch price action before initiating risk.
USD/CAD Has Been Wild This Month
USD/CAD has moved wildly this month, with heavy CAD selling ahead of the announced 25% tariffs at the start of February, only to see the ‘Loonie’ (CAD’s Canadian nickname) rally against the greenback once the tariffs were delayed for one month.
That has created a wide >4% USD/CAD range, with the pair trading near the middle of the YTD high and low (Chart 1).
Trump Says Canada Tariffs Coming Next Week
On Wednesday Trump reiterated his commitment to impose 25% tariffs on Canada and Mexico.
Yet his answers to press questions on the subject were contradictory.
Trump said he will impose the tariffs but later mentioned 2 April as the implementation date for Canada and Mexico tariffs.
A White House official clarified the deadline for these tariffs remained 4 March (in line with the initial one-month delay), stating Trump has not decided whether to grant another extension.
Then yesterday, Trump posted on social media that the tariffs will go into effect on 4 March.
Although the past two days have increased uncertainty, market participants assume Trump will impose the tariffs, as we wrote on 7 February.
USD/CAD Technicals Near Overbought
USD/CAD technical reflect this uncertainty.
The RSI for USD/CAD is currently at ~62, between the 30 (oversold) and 70 (overbought) levels. Currently, the technicals are nearly overbought (Chart 2).
Earlier this week, the RSI was nearer 50, which we consider neutral.
With this week’s rally, those RSIs have risen as expected. Nonetheless, USD/CAD could rally from current levels before the RSIs show the pair as overbought.
Momentum Players Remain Modestly Long USD/CAD
CTA positioning remains modestly long USD/CAD positioning, as it has for the past couple weeks (Chart 3).
However, earlier this month CTA longs in USD/CAD were much more prevalent than now (Chart 4).
These current modest longs do not indicate crowded positioning.
We think positioning was much more crowded earlier this month and contributed to the move from near 1.4800 on 3 February to 1.4150 on 14 February.
USD/CAD could push higher without crowded positioning.
Uncertainty Too High to Hold a USD/CAD Position
US-Canada trade tensions are again a key driver of USD/CAD price action.
This week’s USD/CAD rally concedes to tariffs being in focus again.
Traders, remember that on 1 February Trump announced 25% tariffs would be imposed on Canada on 4 February.
USD/CAD exploded higher when the market reopened on Monday 3 February, printing near 1.4800. But USD/CAD sold off sharply later that day on Trump’s announced tariffs extension.
We think USD/CAD currently only partially prices the prospective tariffs, with traders reluctant to fully price tariffs because another extension is possible.
We expect USD/CAD to trade much higher if tariffs are implemented.
Nonetheless, given the uncertainty, we adopt a wait-and-see approach before initiating any CAD positions.