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Summary
- Over the past week, USD/CAD has been a roller coaster, rallying to a 20+-year intraday high near 1.4800, closing yesterday at a low just above 1.4300 (where it trades now).
- President Donald Trump’s removal of 25% tariffs on Canada this Monday caused the whipsaw CAD price action.
- The tariff question will be revisited early next month.
Market Implications
- Further USD/CAD downside will be difficult despite the sharp move off this week’s spike high. Therefore, while we still like short USD/CAD, we would not chase the move.
Whipsaw USD/CAD Price Action
It is said that a week is a long time in politics.
The same can be said for markets.
This week must have seemed like a million years for USD/CAD traders.
And we still have US and Canada jobs reports today.
After spiking to a 20+-year intraday high of 1.4793 on Monday, the pair closed yesterday at a low, where it lingers (Chart 1).
Long USD/CAD Positioning Less Stretched
USD/CAD long positioning is now less stretched than it was this time last week.
Momentum players have reduced USD/CAD longs this week (Chart 2).
Meanwhile, most recent CFTC data shows hedge funds (HF) have also trimmed short CAD positioning (Chart 3).
Momentum players and HF reducing short CAD positioning makes us think bullish USD positioning in USD/CAD is less crowded than last week.
Lower USD/CAD Should Not Be Celebrated
Last week, we correctly thought there was scope for USD/CAD to trade lower.
However, we do not claim this as an outright victory. Those who sold into Monday’s USD/CAD strength are to be applauded. But that was a big ask given the volatility throughout that day and into this week.
Although we were right to favour USD/CAD downside, we were wrong to think tariffs would be avoided, based on the testimony of Commerce Secretary-nominee Howard Lutnick to Congress last week.
Tariffs were eventually avoided because Canada has ramped up border security, which was consistent with Lutnick’s testimony.
Although we acknowledge how mercurial and unpredictable Trump is, we did not expect the largely performative and highly political gesture of enacting tariffs last weekend, only to remove them on Monday.
Thus, we did not anticipate Monday’s whipsaw price action.
What Now?
If the politically induced volatility has been too little, we get the US and Canada jobs reports later today.
This is additional huge, albeit more traditional, event risk, and it is hard to call, especially after this week’s wild price action.
From a technical perspective, the USD/CAD RSI is now neutral, after approaching overbought levels late last week (Chart 4).
This makes it even more difficult to go into today with a large position.
While we still like short USD/CAD, we would not chase the move given further USD/CAD downside will be difficult.
Tariffs Are Here to Stay
Trump’s tariffs will be revisited early next month.
We largely agree Trump is only using tariffs against Canada as bargaining leverage.
Nonetheless, volatility stemming from Trump’s unpredictability will probably be a key feature for FX markets to grapple with.
USD/CAD will be front-and-centre in this regard. As such, we will continue trading the pair cautiously.