Despite delays and exceptions, the ongoing trade tensions between the US and Canada persist. The trade war damages the Canadian economy, prompting the central bank to take proactive measures. Let’s discuss this topic and make a trading plan for the USDCAD pair.
The article covers the following subjects:
Major Takeaways
- Trade negotiations between the US and Canada continue.
- The trade war has hurt the Canadian economy.
- Global risk appetite is affecting the loonie.
- Short trades on the USDCAD pair can be considered with targets at 1.362 and 1.355.
Weekly Fundamental Forecast for Canadian Dollar
Countries seek guidance from the world’s influential leaders to understand how to navigate their relationship with Washington. If the truce between the US and China allowed them to take a tougher stance in trade negotiations, then the European Union, which quickly retreated due to the threat of 50% tariffs, prompted them to change their stance again. Canadian Prime Minister Mark Carney has stated that it is not in the interests of either side to extend the discussions beyond their current timeline, and disagreements must be resolved promptly.
The head of government’s position is logical. President Trump has imposed 25% tariffs on steel, aluminum, and automobile imports not covered by the North American Free Trade Agreement. Ottawa’s response included tariffs amounting to $43 billion. However, most of these tariffs may have been canceled, according to the media. Finance Minister François-Philippe Champagne was compelled to defend his position, asserting that 70% of the tariffs remained in place.
US Key Trade Partners
Source: Bloomberg.
The ongoing trade war is an acute headache for the Canadian economy. Bank of Canada Governor Tiff Macklem has stated that tariffs are creating headwinds, and if Ottawa and Washington fail to reach an agreement soon, GDP growth will deteriorate in the second quarter.
The impact of US protectionism is already being felt. Over the past two months, Canadian employment has fallen by 75,000, which, when combined with an unemployment rate that has risen to 6.9%, has prompted the derivatives market to raise the chances of the Bank of Canada resuming its monetary expansion cycle in June to 70%. Following the central bank’s adjustment of its preferred average inflation target from 2.9% to 3.2%, the estimates dropped to 35%. Canada is experiencing stagflation, prompting the financial regulator to consider the future of the overnight rate.
Inflation in Canada
Source: Bloomberg.
Against this backdrop, USDCAD bears should not fear monetary expansion. At this stage of global economic development, it is widely recognized as a lifeline for GDP growth, which has been struggling due to tariffs. Conversely, the central bank’s inaction could potentially trigger a recession, as the economy may be unable to withstand the combined impact of import duties and tight monetary policy. There are numerous examples of this tendency. For example, the Fed has adopted a wait-and-see approach while the US dollar is plummeting across the board.
Another point to consider is that the correction in USDCAD quotes is linked to soaring global risk appetite, which hinders the effectiveness of the “Sell America” strategy. Investors are excessively optimistic, as a downturn in the US economy remains a possibility, and as soon as the S&P 500 bubble bursts, the Canadian dollar will likely skyrocket.
Weekly USDCAD Trading Plan
In this regard, short trades on the USDCAD pair can be opened on upward pullbacks with targets at 1.362 and 1.355.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCAD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
Feed from Litefinance.com