The USD/CAD exchange rate remained under pressure on Tuesday as investors focused on the upcoming tariffs between the United States and Canada. It was trading at 1.4250, down by 3.62% from its highest level this year. So, what next for the USD to CAD pair as tariff risks rise?
US and Canada tariffs
The main catalyst for the USD/CAD pair will be the potential tariffs between the US and Canada, which could affect goods worth over $923 billion.
In a statement on Monday, Donald Trump said that the 25% tariff on Mexican and Canadian goods would go forward as scheduled.
In late January, he announced that he would set a 25% tariff on goods from the two countries, a effectively undoing the USMCA deal he signed into law in his first term.
He then postponed the tariffs to March 1st, a move that he expects would lead to a deal between the two countries on immigration and drugs.
It is unclear how further the talks have gone and whether there are signs of a deal between Canada and Mexico. His statement is a sign that the three countries are yet to get to a deal, meaning that tariffs will be implemented. Canada has also pledged tariffs of its own that it hopes will punish the United States.
Implications of tariffs on Canadian economy
A trade war between the US and Canada would have catastrophic impact on the two countries because of the volume of trade.
It would specifically hurt Canada, a country whose economy is struggling. The most recent data showed that the economy expanded by 1% in the fourth quarter, helped by higher exports to the US an fewer imports. The economic growth was lower than the Bank of Canada estimate of 2%.
This performance has pushed the Bank of Canada (BoC) to act and implement interest rate cuts at the fastest pace among peers.It has slashed interest rates in the last six meetings, moving them from 5% to 3%.
Tariffs would complicate the BoC’s view by triggering inflation and slow economic growth. Ideally, the bank would cut rates to stimulate growth, but that would lead to higher inflation.
Crude oil price action
The other catalyst for the USD/CAD pair is the ongoing price action in the crude oil industry. Brent has dropped to $75 from the year-to-date high of $82.42.
There is a risk that the crude oil price will crash as the talks between the US and Russia intensify. A deal between the two countries would likely remove the sanctions that have existed on Russia and lead to more supply.
Donald Trump is also pushing American companies to drill more oil as he hopes to lower prices. He has also warned that he will implement a 10% tariff on Canadian oil and gas.
The USD/CAD is highly sensitive to the price of crude oil and natural gas because Canada is one of the top sellers of oil.
USD/CAD technical analysis
USDCAD chart by TradingView
The daily chart shows that the USD/CAD exchange rate has retreated from the year-to-date high of 1.4787 to the current 1.4247. It has dropped below the 23.6% Fibonacci Retracement level.
The pair has moved below the 50-day and 25-day Exponential Moving Averages (EMA). It has also formed a small bearish pennant pattern on the daily chart.
The USD/CAD pair has also moved between the 23.6% and 38.2% Fibonacci Retracement level. Therefore, there are signs that it will continue falling as bears target the psychological point at 1.4000, which coincides with the 50% retracement point.
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