The USD has benefited from the positive trade developments between the US and China, which have helped ease some stagflation concerns in the US. Coupled with a still-hawkish Fed, the dollar could gain further momentum if additional trade progress is made. On the other hand, tariffs remain the threat to Canada’s economy despite some positive developments surrounding US-Canada.

USD: A recovery ahead?

Since last November, markets has gone from fully embracing US exceptionalism to tentatively dipping their toes into an almost universal ‘sell America’ trade before, ultimately, settling back into an uneasy, ‘love-hate’ relationship with the USD. At the centre of these wild gyrations has been US President Donald Trump, whose seemingly unpredictable and, at times, whimsical policies have fuelled market volatility.

Markets are argue that the USD sentiment and long-term outlook have been damaged beyond repair by Trump’s policy uncertainty. However, that recent market reports about the USD’s ‘demise’ as a reserve currency are grossly exaggerated. So, they are also expect that Trump’s policies in the next 90 days could help repair at least some of the damage done to USD sentiment during the administration’s first 100 days.

In particular, markets expect more progress on: (1) completing deals with key US trading partners; (2) pushing through the US congress tax cuts and other fiscal stimulus measures; and (3) raising the debt ceiling before the US Treasury’s “X-date” (estimated to come in August). These policies could help restore market confidence in the US economy and encourage investors to further adjust their Fed expectations, in a boost to the USD.

The above being said, FX investors could remain sceptical that the USD could rally in the near term. The US data calendar this week is quite light with only the preliminary PMIs for May on the docket. FX investors would therefore focus on Fedspeak as well as any indications that the Trump administration has made progress on the trade deals front. In this regard, the G9 meeting of finance and economic ministers on 20-21 May could attract considerable attention. In particular, investors will be on the lookout for any signs that the US could seek a weaker USD as part of its demands. However, that a strong USD is in the US’s best interest and expect the US Treasury Secretary Scott Bessent to continue to make comments to that effect.

CAD: No fireworks

USD/CAD has risen to 1.40 for the first time in over a month, as the CAD could not cope with the USD resurgence spurred by the USChina tariff agreement. The pair may even have more room to the upside, as the 2Y USD-CAD rate spread is already back to the levels that prevailed when USD/CAD was hovering closely over the 1.44 pivot. Aside from US considerations, another soft Canadian jobs report for April may have strengthened the case for a BoC rate cut next month, as the unemployment rate jumped back to its multi-year highs of 6.9% last month. Any pocket of weakness in Canadian jobs or activity data could in the end carry a greater weight in the BoC’s near-term reaction function, especially as domestic inflation continues to face severe seasonal distortions. Hard on the heels of the sales tax break between December and February, the removal of the consumer carbon tax will embed negative base effects of about 0.7ppt for headline inflation for a year from April. In the end, for the CAD to avoid returning to the same weak levels as Q125, a more pivotal game changer could come in the shape of a trade deal between Canada and the US, which in recent weeks has seemingly focused its efforts on other geographies and economic sectors less relevant for Canada

USD/CAD 4H