G10 FX Weekly: Trump Tariff Two Step Means USD/CAD YTD Range Will Probably Stay Intact

Summary

• President Donald Trump imposed 25% tariffs on all Canadian goods this week, although a one-month exemption has been granted for the auto industry.
• USD/CAD rose on the news but is now lower on the week. This is partly because of the prospect of the auto exemption, but also on broader USD weakness.
• The US-Canada trade war looks set to continue. Tomorrow’s US and Canadian jobs data are now the near-term focus for FX markets.

Market Implications

• Given the US-Canada trade war, we do not think USD/CAD will trade beyond the ~1.4150/1.4800 range (including intra-day) seen last month.
• However, broad USD weakness means the downside is probably more vulnerable.
• Nonetheless, given uncertainty and Trump’s unpredictability, we prefer standing aside in USD/CAD.

USD/CAD Tariff Reaction Was Relatively Tame

USD/CAD is now lower than at the close of business last week. This is despite the pair spiking as high as ~1.4550 after the US imposed tariffs on Tuesday (intraday, Chart 1).

Broader USD Price Action Has Been Decisively Bearish

Broader USD weakness partly caused this week’s USD/CAD drop, with the USD Index (DXY) down over 3% so far this week – its worst week since November 2022.

USD/CAD Technicals Are Back to Neutral

As expected, the USD/CAD RSI has fallen with the spot price.

The USD/CAD RSI is currently at ~52, between the 30 (oversold) and 70 (overbought) levels. Currently, we think these technicals are firmly neutral (Chart 2).

DXY Technicals Are Oversold

With the massive DXY sell off this week, the RSI is now at 29, which is below the 30 oversold threshold (Chart 4).

Momentum Players Turn More Bullish USD/CAD

CTA positioning bullish signals have strengthened this week (Chart 5).

Prospects for USD/CAD?

All of this indicates further messy USD/CAD price action.

Even though automakers are exempt from the newly imposed tariffs on Mexico and Canada for one month, the tariffs could be long term.

Additional tariffs on Canada, as part of a broader US imposition of reciprocal tariffs to be imposed on 2 April, cannot be ruled out.

This probably limits USD/CAD downside for the next month or so.

Canada has retaliated, with additional Canadian tariffs on US good to begin later this month.

While general USD weakness has also weighed on USD/CAD this week, with DXY technicals indicating the index is oversold, we would not be surprised to see an upward correction in the broader USD sell-off.

If this happens, it will limit USD/CAD downside and lift the pair.

With CTAs also ramping up USD/CAD bullishness, the messiness could deepen. Long positioning from momentum players threatens to become crowded, which has the potential to make USD/CAD price action even more volatile.

As a result, we think it prudent to stand aside in USD/CAD. It is not currently possible to devise a sensible risk/reward trading strategy, long or short.

This is especially true, give that we get US and Canadian jobs data tomorrow.

Expect volatility, with choppy price action and very little direction for USD/CAD.

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