FX Daily: Trive Bullish on USD/CAD
Today is a crucial day to watch. If the US imposes a 25% tariff on Canada and Mexico, the USD could strengthen further, putting pressure on the CAD and MXN. However, there is a slight chance that Trump might reverse his decision again, posing a risk to this outlook.
USD: Today is big day
The USD remains supported primarily due to the tariffs threat, the Fed's cautious stance on rate cuts, and ongoing geopolitical uncertainty, particularly surrounding the ceasefire talks between Russia and Ukraine. Firstly, Trump stated that the 25% tariffs on Canada and Mexico are on track to go into effect on 4 March, along with an additional 10% tax on China, presumably on top of the 10% already imposed in February. This highlights a protectionist stance that fuels demand for the USD as a safe haven. Furthermore, these tariffs risk pushing US inflation higher by raising import costs, complicating the Fed’s path to rate cuts and reinforcing USD strength. Secondly, on the monetary policy front, the Fed remains cautious about rate cuts, with officials like Hammack and Harker emphasizing a "wait-and-see" approach. Despite some cooling in inflation — with core PCE rising 2.6% y/y — the Fed appears in no rush to cut rates until there's clear evidence of a sustained drop. ING noted that as long as markets expect no more than two cuts in 2025, the pass-through to a weaker dollar will be limited, and a gradual worsening of US activity and employment should not hinder a tariff-led dollar rally. Additionally, geopolitical risks also underpin USD strength, not only due to the tense US-Ukraine meeting, where Trump's confrontational remarks toward Zelensky raised concerns about future US-Ukraine relations, but also from growing US-EU trade tensions. Trump’s threat of tariffs on European goods adds another layer of support for the USD as investors brace for broader global trade disruptions.
Looking ahead, the USD calendar is quite busy, with several important data releases, such as ISM PMI, S&P PMI, and the February NFP report. The latter will be the most important for the market as it could shape expectations for the Fed's rate cut cycle. While the Fed previously signaled that the labor market is no longer the main source of inflation and risks are more balanced, further cooling in job data will reinforce the "no hurry to cut" and "wait-and-see" approach. However, the February NFP report may contain some noise due to DOGE’s efforts to shrink the federal workforce, reflected in last week’s jobless claims, so any sharp moves could be distorted by this one-off effect. Despite this, a further softening in labor market data might be seen as an encouragement to the Fed, but tariffs remain the main driver of USD momentum. Market positioning also adds another dimension — with investors already leaning long on the dollar, the scope for further gains may depend on additional trade escalations or stronger US data surprises. Overall, the baseline outlook for the USD remains bullish and well-supported unless there is a significant reversal in tariff policies or an unexpected shift from the Fed.
CAD: Survive or die
The baseline outlook for CAD remains bearish, primarily due to the looming US tariffs risk, which is expected to outweigh any positive domestic data for time being. The upcoming leadership vote on 9 March adds another layer of uncertainty, taking place just days after the 4 March deadline for the US to impose tariffs on Canada and Mexico. Recent polls show that the Liberal Party, under Mark Carney’s leadership, is gaining ground by adopting a firmer stance against Trump’s trade policies, which could further complicate future trade negotiations. This political backdrop suggests that any shift in leadership may not ease trade tensions, keeping CAD vulnerable.
The threat of tariffs has kept the CAD soft, with the US now seemingly focused on restricting Canada and Mexico's access to third markets — particularly China — rather than simply revisiting trade imbalances. US Treasury Secretary Bessent hinted at a broader strategy, suggesting it would be a "nice gesture" for Canada to match US tariffs on China, aligning with Mexico’s proposal for a "Fortress North America." This underscores a shift toward a more protectionist North American trade bloc, putting further pressure on the CAD. ING projects downside risks for the CAD, with USD/CAD potentially trading at 1.48 if tariffs are enforced, and breaking 1.45 would signal that markets are fully pricing in the tariff risk. Moreover, cross-rates like CAD/JPY could drop to 100, reflecting the broader risk-off sentiment tied to trade war fears.
Despite Canada’s Q4 GDP growing at an annualized 2.6%, surpassing the 1.8% forecast, the market's focus remains fixated on the tariff story. The robust economic momentum, driven by consumer spending and exports, has done little to support the CAD, as trade policy concerns dominate. Ultimately, unless there is a significant shift in US trade policy — such as a delay or softening of the proposed tariffs — the CAD is likely to remain under pressure. The bearish bias holds firm, with any short-term gains in the CAD likely presenting selling opportunities, especially if the US moves forward with its aggressive trade strategy this week.
USD/CAD 4H
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