USD/CAD Forecast: Tariff Jitters Clash with Weaker U.S. Data and Bond Bulls

• USD/CAD lifted by Trump’s tariff push but faces resistance overhead
• U.S. data missing forecasts at the fastest pace in five months
• Fed rate cut bets grow, pushing Treasury yields to 2025 lows
• Bond futures signal lower yields, reinforcing bearish USD/CAD risks
• Key levels: Watching 50DMA for potential short setups

Summary

The Canadian dollar has been on the back foot against its U.S. counterpart since President Donald Trump reaffirmed earlier this week that proposed 25% tariffs on Canadian imports remain on track for early March implementation. However, how much further USD/CAD can push higher is questionable given its strong long-term correlation with U.S. 10-year Treasury yields.

The broader environment isn’t exactly supportive of the U.S. dollar right now. U.S. economic data is rolling over, the government is in austerity mode, Treasury supply remains purposely restricted, and Scott Bessent has made it clear that lowering benchmark rates is a key priority for the Trump administration to ease borrowing costs for households and businesses. Add in an unfavourable technical backdrop for bond bears and USD/CAD’s proximity to a well-defined resistance zone, and a potential short setup is emerging.

Economic Divergence Evident

U.S. economic data is now undershooting market expectations at the fastest pace in more than five months, as reflected in Citigroup’s economic surprise index below. A reading below zero—seen in the blue shading—indicates more data is missing to the downside than exceeding forecasts. While this doesn’t suggest economic activity is collapsing, just underperforming relative to expectations, it stands in stark contrast to Canada, where data is surprising to the upside at the strongest rate since July last year.

Source: Refinitiv

Tariffs or not, that’s hardly a macro signal that screams buy USD/CAD, especially with Canada pledging to retaliate if the U.S. moves ahead with the measures.

U.S. Bond Bulls Running Hard

Fixed income markets are attuned to weaker U.S. data. Futures now reflect expectations for more than two full 25bp rate cuts from the Fed in 2025—the most since mid-December—while the U.S. 2s10s curve is now the flattest in nearly three months. That suggests growth and inflation expectations are being pulled back at a rapid pace.

Source: TradingView

U.S. 10-year Treasury yields have also fallen to their lowest level of 2025. That’s significant for USD/CAD given the pair has maintained a 0.92 correlation coefficient with benchmark yields over the past six months.

Downside Risks for Yields, USD/CAD?

From a technical perspective, U.S. 10-year Treasury note futures—used to gauge directional risks for yields due to their inverse relationship with bond prices—suggest downside risks to both may be increasing.

Source: TradingView

Benchmark bond futures have surged into the contract roll on heavy volume, reclaiming a key uptrend that previously acted as strong buying support before breaking down in late December.

While some may argue that the price is forming a rising wedge—suggesting fresh shorts are positioning for a resumption of the bearish trend—I’m unconvinced after this week’s bullish price action. RSI (14) and MACD are flashing bullish momentum signals, and with fundamentals favouring bond bulls, the path of least resistance appears to be higher. That means lower yields.

USD/CAD: Bearish Bias Favoured

While falling yields would typically support USD/CAD outside of extreme risk-off periods, there’s no rush to short just yet. However, if the pair pushes a little higher, it will approach its 50-day moving average—a level it struggled to break earlier this month.

Source: TradingView

A short trade could be established at the 50-day moving average, with a stop above 1.4372 for protection. The first downside target would be 1.4270, followed by 1.4150. A break of the latter could open the door to further declines towards 1.4100 or even 1.3932.

RSI (14) has turned higher, and MACD has crossed over from below, signalling momentum is shifting bullish. Again, that reinforces the need for patience before entering short positions.

Elevated Event Risk

Beyond tariff headlines—which are arguably close to being priced in given Trump has already followed through on a similar threat with China—there are significant event risks over the next three sessions that could trigger meaningful market volatility.

Source: TradingView

Nvidia’s earnings report after Wednesday’s close is a key one, given the hype surrounding AI stocks. A miss would likely drive risk aversion, supporting the U.S. dollar. U.S. GDP could also fuel economic concerns if it undershoots expectations, while Friday’s PCE report will be closely watched—not just for the Fed’s preferred inflation measure but also for consumer income and spending data. Weakness there would typically support short USD/CAD positions.

-- Written by David Scutt

Follow David on Twitter @scutty