FX Daily: Trive Bullish on USD/CAD
The Canadian dollar remains under pressure due to US trade policy risks, with a 25% tariff on Canadian steel and aluminum taking effect on April 2. Meanwhile, the Fed maintained rates and emphasized economic uncertainty but did not signal a dovish shift. With tariffs supporting USD and CAD underperforming within G10, USDCAD remains biased higher, especially if US economic sentiment stabilizes.
CAD: Tariffs Threat
The baseline outlook for CAD remains bearish, primarily due to US trade policy risks. Notably, the US has already imposed a 25% tariff on Canadian steel and aluminum imports, with an additional 25% reciprocal tariff set to take effect on April 2nd. Reports suggest that Canadian authorities have been informed that these tariffs are virtually certain to be implemented, creating a significant headwind for CAD. Beyond trade policy, recent declines in global equities, driven by concerns over US tariffs and a potential economic slowdown, have challenged the US exceptionalism narrative. While markets are pricing in a diminishing US growth premium, which could weigh on USD, CAD remains the least likely G10 currency to benefit due to its strong correlation with US economic performance. If US growth sentiment continues to deteriorate, CAD is likely to remain an underperformer within the G10 FX space. Overall, the near-term outlook for CAD remains tilted toward sustained weakness. Goldman Sachs has favored expressing this bearish CAD view against MXN and also sees long EUR/CAD as an attractive trade for investors looking to capitalize on European optimism while minimizing exposure to USD fluctuations.
On the domestic front, February's CPI release was strong but failed to offset CAD weakness, as it primarily reflected temporary inflationary factors. The reintroduction of the Harmonized Sales Tax (HST) on select goods and services on February 15 contributed to rising prices, while upcoming policy changes in April, including the removal of the carbon tax, add further uncertainty to inflation trends. Looking ahead, the CAD calendar remains light, with the Canada GDP release being the main domestic event of interest. However, given that trade policy remains the dominant driver for CAD, any positive data surprise is likely to have only a short-lived impact, particularly as the April 2nd tariff deadline approaches. Barring a major reversal in US tariff policy, which seems unlikely, the Canadian dollar is expected to remain under pressure.
USD: Tariffs ahead
Over the past week, the key narrative driving the USD has remained centered on tariffs and the March FOMC meeting. Regarding tariffs, the reciprocal tariff plan is scheduled for announcement or implementation on April 2, alongside an additional 25% sectoral tariff on automobiles, semiconductors, and pharmaceuticals. Canadian authorities have reportedly been informed that these tariffs are virtually certain to take effect on April 2. On monetary policy, the FOMC maintained the federal funds rate at 4.50%, in line with market expectations. The median Fed dot plot projections remained unchanged across the forecast horizon, still signaling two rate cuts in 2025. Notably, the Fed removed its prior language suggesting risks to its policy objectives were "roughly in balance" and acknowledged heightened uncertainty surrounding the economic outlook though Powell later clarified that this was not intended to signal an imminent policy shift.
The Summary of Economic Projections (SEP) largely met market expectations, with downward revisions to GDP growth projections for 2025 and 2026, alongside a higher unemployment forecast for 2025. Additionally, both headline and core PCE inflation projections were revised upward due to significant uncertainty surrounding potential policy shifts under a second Trump administration. During the press conference, Powell emphasized a "wait-and-see" approach, reiterating that the Fed is not in a hurry to adjust policy—an assertion he repeated when questioned about a potential rate cut in May. He repeatedly underscored the prevailing economic uncertainty and urged caution in interpreting Fed forecasts.
Additionally, Powell also suggested that any inflationary impact from tariffs would likely be transitory and that long-term inflation expectations remain well-anchored. While markets interpreted his remarks as slightly dovish, Powell's overall stance did not signal recessionary risks or an imminent economic downturn. Instead, he reaffirmed that the economy remains strong, with labor market conditions broadly balanced and not a primary source of inflationary pressure. Given the Fed's dual mandate of price stability and full employment—neither of which has weakened sufficiently to justify a dovish pivot—Powell’s slightly dovish tone does not indicate renewed bearish momentum for the USD. Instead, it marginally supports the currency.
Looking ahead, the USD calendar is event-heavy, with key data releases including PMIs, Consumer Confidence, and the February PCE—the Fed’s preferred inflation gauge. Given recent ISM and Michigan Consumer Confidence data showing signs of pessimism amid concerns over Trump’s policies and potential recession risks, a softer economic tone is expected. However, much of the USD-negative sentiment related to growth has already been priced in, meaning a further decline would require another wave of weak data. Powell also noted in the March meeting that the PCE inflation likely rose 2.5% in February, with core PCE at 2.8%, partly reflecting tariff-related concerns. Overall, the baseline outlook for the USD remains well-supported by the Fed’s current stance, a still-resilient economy and also the tariffs theme. However, for a sustained USD recovery, U.S. macroeconomic sentiment must begin to stabilize.
USD/CAD 4H
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