USD/CAD Forecast: The Canadian Dollar Loses Ground as Tariffs Take Effect

The USD/CAD has maintained a steady upward movement, accumulating an appreciation of over 1.5% in the last six trading sessions in favor of the U.S. dollar. Currently, the Canadian dollar is struggling to maintain its strength as the threat of new tariffs imposed by the White House has become a reality. Bearish pressure on the Canadian dollar seems to be holding firm as uncertainty grows regarding how these new tariffs will impact the country's economy.

 

Tariffs Take Effect

 

Today, 25% tariffs on goods from Canada and Mexico entering the United States are expected to become official. Additionally, the Trump administration has imposed approximately 10% tariffs on Chinese imports, as confirmed by the president yesterday. In his statement, Trump made it clear that this time there will be no delays or exceptions, and that the new measure will take effect immediately.

So far, the primary reason behind this tariff strategy is to control illegal immigration and drug trafficking, particularly fentanyl, which enters the U.S. through its borders. The administration has also stated that these measures aim to reduce inefficiencies in U.S. trade and encourage more manufacturing to return to American soil.

In response, Canadian Prime Minister Justin Trudeau has stated that there is no justified reason for these new tariffs. According to Trudeau, American citizens will likely face higher prices on essential goods and energy, in addition to damaging a historically strong trade relationship between the two countries.

As a countermeasure, Canada is preparing reciprocal 25% tariffs on all U.S. imports, initially targeting $30 billion CAD worth of goods. These additional tariffs are expected to take effect by the end of the day.

With this, it can be said that a new trade war has officially begun, at least between the three nations directly involved with the United States. At this point, there are no signs that the White House is willing to negotiate or soften its stance in the short term.

The market has already begun to react to this new scenario. Confidence in the Canadian dollar has been shaken, as approximately 75% of Canadian exports go to the United States. These new tariffs could significantly reduce that figure, impacting Canada's economic activity.

Meanwhile, investors believe that in the short term, the currency that will withstand the trade war more effectively is the U.S. dollar. As a result, demand for the USD has increased, leading to consistent downward pressure on the Canadian dollar.

 

How Is Market Confidence in the Canadian Dollar?

 

The Canadian Dollar Currency Index (CXY), which measures the strength of the Canadian dollar against major currencies, has consistently remained below 70 points, a level that had been regained in mid-February. Currently, the index shows a clear bearish bias, reflecting the Canadian dollar's weakness in the short term.

Source: TVC, Tradingview

As long as values below 70 points remain constant, market confidence in the Canadian dollar will continue to decline. If traders continue to believe that the trade war will hurt Canada more than the U.S., the CXY index could keep losing demand, directly impacting USD/CAD price action. If this situation persists, the upward pressure on the U.S. dollar could become a major issue for Canadian dollar positions in the short term.

 

USD/CAD Technical Forecast

Source: StoneX, Tradingview

 

• Strong Upward Movement: Since February 21, the USD/CAD has followed a steady upward trend, gradually weakening the Canadian dollar. Currently, the pair has reached the key resistance level at 1.44811, which stands as the most critical level to watch for the uptrend to continue.

  For now, recent candlestick formations at this level have shown strong indecision, suggesting that the price may have encountered a significant barrier. If this indecision persists, and no new candles emerge to confirm renewed buying pressure, the current upward movement could stabilize into a neutral phase in the upcoming sessions.

   

   

• TRIX: The TRIX indicator line remains near the neutral zone at 0, indicating that the average movement of recent moving averages has started to reflect a neutral bias in the market.

  If the indicator begins showing values above 0, the bullish bias could strengthen again, reinforcing the buying trend seen over the past week in USD/CAD.

   

• RSI: The RSI line continues to show a bullish bias, as it oscillates above the neutral level of 50. This suggests that, on average, buying pressure has consistently outpaced selling pressure over the last 14 sessions.

  However, the line is approaching the overbought level (70), which could indicate a potential imbalance between buyers and sellers, increasing the probability of short-term downward corrections in USD/CAD.

   

   

  Key Levels:

   

• 1.44811: Main resistance. This level aligns with the January high and the most recent peaks of the long-term uptrend. If the price breaks above this level decisively, the bullish trend could gain momentum, bringing buying strength back into play.

   

• 1.43398: Nearby support. This level coincides with the 50-period moving average and the support area of the Ichimoku cloud. If the price approaches this level, it could increase the likelihood of USD/CAD entering a sideways range in the upcoming sessions.

   

• 1.41454: Final support. This level represents the lowest price zone recorded in recent months and serves as the limit of the current bullish structure. If the price breaks below this area, it could jeopardize the long-term uptrend, paving the way for a more significant bearish movement.

 

 

Written by Julian Pineda, CFA – Market Analyst