FX Daily: Trive Bullish on USD/CAD
In short, it is too early to conclude that the USD has turned bearish despite recent growth concerns. The Fed is expected to maintain its current rate, and tariffs remain in place. March 12th is a key date to watch — if new tariffs are imposed, the CAD could face additional downward pressure. Meanwhile, the BoC is anticipated to cut rates by 25bp, a move that is almost fully priced in by the market.
USD: Too early to say bearish
Over the past week, the USD faced pressure primarily due to a shift in market focus away from Trump’s tariff rhetoric, with growing concerns about a potential slowdown in the US economy. Recent data releases, including retail sales, consumer confidence, and the ISM Manufacturing PMI, showed notable declines. This has led markets to continue pricing in approximately three rate cuts for the remainder of the year. Meanwhile, Trump delayed tariffs on imports from Canada and Mexico — at least those covered by the USMCA trade deal — pushing the implementation to April 2nd, the same day as Trump's planned reciprocal tariff measures. This back-and-forth on tariffs added further pressure on the USD. However, despite the delay, it would be premature to dismiss the impact of Trump's tariff actions on the dollar. Aggressive trade measures are still expected, not only on April 2nd but also on March 12th, which marks the deadline for US tariffs on aluminum and steel. Therefore, it remains too early to turn bearish on the USD solely due to the current growth concerns and tariff postponements.
Beyond trade policy, the February NFP report showed job gains of 151K, below the expected 160K, with the previous figure revised down to 125K from 143K. The unemployment rate edged up to 4.1% from 4.0%, contrary to expectations for it to remain unchanged, but still below the Fed's year-end forecast of 4.3%. While the report wasn’t as weak as some feared, there is significant uncertainty ahead, particularly with the government’s job cut efforts under the DOGE. Overall, this data is unlikely to shift the Fed’s stance significantly, as their primary focus remains on future economic growth risks. Money markets are currently pricing in around 70bps of rate cuts this year, with the next cut fully priced by June. The Fed is widely expected to keep rates unchanged in March, while May’s decision appears evenly split at around 50/50. Following the NFP report, Powell reiterated his recent messaging, emphasizing that the Fed is not in a hurry to adjust policy despite uncertainties, while noting that the economy remains in a solid position. This reaffirms that there is no immediate need for additional rate cuts, which could temper the market’s current expectations of three cuts this year and provide some relief to the USD.
Looking ahead, the US economic calendar is packed, featuring CPI, PPI, the University of Michigan Preliminary Consumer Sentiment Index, JOLTS, and the March 12th tariff deadline on aluminum and steel. The CPI report is expected to show another strong 0.3% m/m increase — with markets needing an average of 0.17% m/m to sustain 2% y/y inflation — keeping the Fed cautious and making the March FOMC meeting likely a non-event. Overall, the baseline outlook for the USD remains bullish. However, with ongoing growth concerns to drag the USD recently, another set of strong domestic data and clear trade policy developments will be necessary to drive the next leg higher for the USD.
CAD: Still at the risks
President Trump’s decision to scale back the tariff hikes imposed on Canada until April 2nd has provided some temporary relief for the CAD, helping to soften the immediate negative economic impact. However, downside risks will grow the longer these tariffs remain in place, with April 2nd flagged as a key date for tariff reassessment. Additionally, March 12th is another important moment for Canada, marking the deadline for US tariffs on aluminum and steel. Given these looming risks, any recovery in the CAD is likely to be short-lived. Moreover, the heightened downside risks to growth from trade disruptions are expected to overshadow recent positive Canadian data, which showed stronger-than-expected economic performance last year. As a reminder, real GDP expanded by 2.6% in Q4, while Q3 growth was revised significantly higher by 1.2 percentage points to 2.2%.
Looking ahead, market focus will shift to the BoC’s March meeting. The negative economic fallout from trade policy uncertainty and higher tariffs will likely increase pressure on the BoC to cut rates further, with markets currently pricing in an 86% probability of a 25bps rate cut. Additionally, the possibility of larger 50bps cuts cannot be ruled out in the coming months if the trade war escalates and Canada's economic slowdown deepens. As a result, the BoC is expected to place greater weight on the disinflationary effects of weaker growth rather than the inflationary impact of retaliatory tariffs. In these circumstances, the CAD is likely to continue underperforming in the near term. Overall, the baseline outlook for the CAD remains bearish, despite the temporary relief provided by the postponed tariffs. In the short term, US trade policy is expected to outweigh any hawkish domestic data, keeping the CAD under pressure.
USD/CAD 4H Chart
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