Canadian Dollar Forecast: USD/CAD Dip and Rip on Trump Tariffs

Canadian Dollar Talking Points:

• USD/CAD sold off aggressively on Wednesday to go along with a larger reaction of USD-weakness after the tariff announcement.
• Friday brought a bounce up to lower-high resistance with 1.4240 coming back into play. That level was the low on two separate tests in March and has so far held the highs on the pullback in the pair.
• The shorter-term bearish trend in the pair aligns with the longer-term range but given the volatility of the drivers and the bounce on Friday, traders should remain cautious.

Indices AD

Thursday brought the largest single-day sell-off in the U.S. Dollar since November of 2022, which was just after DXY had topped following the Fed’s rate hike campaign earlier that year. There was also a shifting backdrop in Europe, with the ECB getting more-hawkish and hiking rates which further contributed to declines.

This time, however, it seems that much of that push was guided by pure uncertainty following the tariff announcement from President Trump the day before. U.S. equities cratered and U.S. yields fell dramatically, helping to drive the USD lower as breakouts showed up in EUR/USD and GBP/USD.

Friday brought a relief bounce in that theme but it’s still too early to say that a low is in. As I had looked at in the Thursday article, the USD has already pushed very closely to a key support zone – the same that was in-play last Q3 before the USD reversal took over. But, given the shifting fundamental dynamics on the back of the tariff scenario, which I’ll attempt to parse through below, there could be a resetting of sorts to show in global markets which could have an outsized impact on FX.

In USD/CAD, I had looked at the pair ahead of that tariff announcement on Wednesday and the first chart shared in that article was the monthly chart, highlighting the longer-term range that remains in-play today. This doesn’t necessarily speak to specific timing but it does highlight the fact that there could be a bearish drive in USD/CAD if this range is to remain in-place. And as I’ve said before – if it doesn’t, the consequences could be large for the U.S. as a surging U.S. Dollar would be yet another challenge to deal with amidst a number of other volatility events.

USD/CAD Monthly Chart: The Big Picture Range

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD: The Fundamental Backdrop

While Canada was the initial focal point for tariffs when Trump started to discuss the topic more widely back in November, last week seemed to shift that focus on the rest of the world. This isn’t to say that tariffs on Canada won’t be a factor moving forward, but the fact that there’s more widespread integration in the global economy highlights the fact that Canada is most certainly not alone, at least to the degree that it may have seemed back in early February.

With that said, some impact has already shown in the auto sector in response to Trump’s 25% tariffs on automotives: PM Mark Carney has responded by placing 25% tariffs on U.S. made cars, and Stellantis/Chrysler has paused production at two plants in Canada and Mexico.

This adds some considerable uncertainty to the fundamental side of both U.S. and Canadian economics, along with related markets. But, from a price action perspective, this can be looked at in a different way, in my opinion.

While the future is always uncertain and no trade setup is a definite type of thing, the injection of this additional uncertainty simply means a higher level of potential volatility. That can mean larger moves in either direction, similar to what showed earlier this week in USD/CAD; but it also may mean a lower probability of getting on the ‘right’ side of those moves as the additional uncertainty produces more risk factors.

Technical traders can attempt to respond to this by looking for larger targets and tighter stops in effort of offsetting a lower expected win ratio. This can also increase the importance of support and resistance dynamics to help with setting up those possible risk-reward scenarios.

Also a possibility is tightening entry logic, which could be accomplished by using support and resistance levels from a longer-term chart (even if triggering positions on shorter-terms) and by trying to avoid common pitfalls like extending stops or failing to use them altogether as the additional volatility could entail a longer run against positions.

From the weekly chart below the danger of chasing becomes even more apparent as those that sold on Friday looking for extension in the move ran into a 170+ pip pullback from the lows.

USD/CAD Weekly Chart

USD/CAD Shorter-Term Strategy

From the Wednesday article I had highlighted shorter-term structure in USD/CAD, saying that I wanted to see a daily close below that 1.4100 level to expose the larger long-term level at 1.4000; which is the price I would want to see bears push through to bring the longer-term range back to life looked at in the first chart in this article.

But 1.4100 was the price that gave bears trouble on Thursday and helped to lead to the bounce on Friday, which has so far found resistance right at prior support of 1.4240. There’s some additional resistance potential a bit-higher on the chart, from around 1.4280-1.4300, after which 1.4371-1.4402 comes back into the picture.

Given the failure from bears to punch down to a 1.4000 test, I don’t think that we can completely rule out bullish potential in the pair just yet, but I’d want to see a closed body break on the daily or four-hour above that 1.4402 price to open the door for a 1.4500 test; and that’s the level that gave bulls problems multiple times in March. But, if we do see change afoot which certainly cannot be ruled out given what’s behind the volatility push, that breach of 1.4500 opens the door to tests of major long-term resistance levels at 1.4600, 1.4690 and 1.4793.

USD/CAD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist