FX Daily: Trive Bullish on USD/CAD
The threat of tariffs remains the primary driver of the current market environment, making it difficult to say that Canada has successfully escaped this risk, even though the tariffs have been delayed until April. Meanwhile, political uncertainty in Canada continues to weigh on the CAD, adding further pressure.
CAD: Remain uncertains
The CAD has recently regained some strength as the market does not perceive the proposed reciprocal tariffs as an immediate threat, given the mandatory six-week delay before enforcement. However, the long-term risks remain uncertain, as the reciprocal tariffs are not the only factor threatening Canada’s economy. Notably, former President Trump has already signed actions imposing 25% tariffs on all imports of steel and aluminum, which are set to take effect on March 12. The CAD is particularly exposed to these tariffs, given Canada’s significant trade in these commodities. Furthermore, Trump has hinted that tariffs on metals could increase and that he is considering extending tariffs to other sectors, such as semiconductors, pharmaceuticals, and automobiles. A White House official also suggested last Tuesday that additional levies on Canadian goods could result in total tariffs as high as 50%. These developments add to the growing uncertainty surrounding Canada’s trade relationship with the US.
Compounding these challenges are domestic political factors, including Canada’s parliamentary standstill, the upcoming election, and the ongoing political transition. These issues make a long-term resolution with the US less certain compared to agreements with Mexico and other countries targeted by Trump. This political and trade uncertainty adds another layer of complexity to the current economic environment, potentially weighing on the CAD over the medium to long term.
Looking ahead, market attention will shift to Canada’s January CPI data. However, this release may prove to be a non-event for the Canadian market, as the Bank of Canada BoC removed its forward guidance on monetary policy during its January meeting. The central bank cited heightened uncertainty, particularly from the tariff threats, as a reason for adopting a more cautious approach. The BoC stated that it will evaluate the need for further policy rate adjustments on a meeting-by-meeting basis, emphasizing data dependency. As a result, the January CPI is unlikely to significantly alter the BoC’s stance in the near term. Instead, market focus will remain squarely on the evolving trade dynamics between the US and Canada, particularly the implementation and potential escalation of tariffs.
In all, although the CAD has found some support in the near term due to the delayed implementation of reciprocal tariffs, the currency remains vulnerable to a range of risks and it expect the curremcy’s trajectory will likely be driven by external factors, particularly the evolution of US trade policy, rather than domestic economic data alone.
USD: Tariffs threat
Over the past week, the USD has shown relative softness compared to other G10 currencies, driven by two key factors. First, markets do not perceive President Trump’s reciprocal tariffs—signed last week—as an immediate threat , viewing them more as a negotiating tactic than a definitive policy shift given it will be impletment by 2 April. Second, optimism around a potential Russia-Ukraine ceasefire has improved risk sentiment, with Trump claiming a “productive call” with both leaders and suggesting the war could end “immediately.” Additionally, recent US macroeconomic data reinforced the Federal Reserve’s cautious easing path, signaling that while rates may remain on hold for now, disinflation trends remain intact. However, risks surrounding tariffs remain significant. Trump’s directive to base “reciprocity” not only on tariffs but also on non-tariff factors—such as VAT rates, exchange rates, and regulatory barriers—adds layers of complexity. These factors are harder to quantify and could lead to broader, more disruptive implementation of reciprocal tariffs. This uncertainty underscores that the current USD dip is likely a correction, not a structural downtrend, and ongoing trade policy ambiguity should continue to support the dollar until clarity emerges.
On the domestic front, Federal Reserve Chair Jerome Powell’s two-day Congressional testimony provided little new insight, as he reiterated the Fed’s patient stance. Powell emphasized that long-term inflation expectations remain “well anchored,” the labor market is not fueling inflationary pressures, and the FOMC will take a data-dependent approach. The January CPI and PPI reports further validated this narrative. The January CPI surprised to the upside, with headline and core inflation rising 0.5% and 0.4% month-on-month, respectively. However, markets attributed the jump to residual seasonality and components like auto insurance and hospital services, which do not directly feed into the Fed’s preferred core PCE measure. Meanwhile, the January PPI also came in hot, but components linked to the PCE deflator softened, aligning with the Fed’s view that disinflation remains on track. Powell’s repeated message—that the Fed will not overreact to one or two data points—calmed markets, reinforcing expectations that rate cuts will proceed cautiously.
Looking ahead, the US economic calendar is light in the near term, with only a handful of Fed speeches and preliminary PMI data on tap. Fed officials are likely to echo Powell’s cautious tone, while PMIs are expected to reflect continued economic resilience. Market attention will remain laser-focused on two key areas: Trump’s tariff rhetoric and Russia-Ukraine developments. Any escalation in tariff rhetoric or expansion of tariff targets (e.g., inclusion of non-tariff factors) could reignite USD strength. While a Russia-Ukraine ceasefire would boost risk sentiment, its impact on the USD is likely secondary to trade policy risks. Overall, the USD’s baseline outlook remains supportive, anchored by Fed patience, structural trade policy uncertainty, and global safe-haven demand. A sustained downtrend would require either a significant reversal in tariff policies or a definitive resolution to the Russia-Ukraine conflict—neither of which appears imminent.
USD/CAD 4H
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