USD/CAD forecast: Sell America trade gathers pace

Although US equity indices managed to bounce off their earlier lows, risk appetite largely remained subdued – though you wouldn’t have known that by just looking at commodity dollars. Indeed, the likes of the AUD, NZD and CAD have all gained ground against the US dollar, which doesn’t typically happen in a risk off environment. Yet this is reminiscent of last year when those reciprocal tariffs announcement had triggered the so-called “Sell America” trade. This time, Donald Trump appears like he is in no mood to back down as he has re-affirmed his desire to acquire Greenland. The truly unthinkable scenario would be Trump resorting to military force to take control of Greenland. While he sidestepped the question when pressed by journalists, the very idea of annexation is enough to unsettle markets. Even without boots on the ground, the renewed threat of tariffs carries the same disruptive potential. Over the weekend, Washington announced fresh duties on several European countries, and markets have responded in dumping equities, cryptocurrencies and the dollar.

 

Meanwhile, the Supreme Court has again made no decision the legality of tariffs. That decision could now wait until February 20, giving markets plenty of time to keep the dollar under pressure while Trump doesn’t backdown from his demands.

 

The Canadian dollar meanwhile has responded positively to news Canadian Prime Minister Mark Carney is trying to find new global trading partners. He wants to work more closely with China and has inked a few smaller trade deals. Still, Canada's geographic location and its still large economic dependency on the US means there is so much it can do move away from the influence of the US.

 

Dollar retreats as risk appetite fades

 

The US ramped up the pressure over the weekend, threatening to lift tariffs from 10% to 25% on eight European nations. This fits neatly with the administration’s maximum-pressure approach, but it raises uncomfortable questions for investors. Is Europe reaching the end of its relatively patient stance towards Washington? And could the EU’s Anti-Coercion Instrument soon be deployed in response? The potential for trade retaliation, coupled with concerns about fractures within NATO, looks set to dominate the policy agenda this week, pushing Ukraine-related discussions firmly into the background. Investors are well aware of the so-called “TACO trade”, where past flare-ups have often fizzled out into little more than political theatre. That familiarity may explain the reluctance to chase the headlines too aggressively. Still, complacency would be dangerous. Volatility has crept back into FX markets after a relatively calm period, and developments are worth watching closely.

 

USD/CAD key levels to watch

 

 

The USD/CAD has turned lower from a massive area of resistance between 1.3900-1.3950 (shaded in orange on the chart). This area was previously support and the drop from here means the series of lower lows and lower highs created since rates peaked last February, remains intact. Given this backdrop, the path of least resistance remains to the downside for this pair, keeping the bears in control – especially if we now see the next support at 1.3800 breakdown. Should 1.3800 give way decisively then 1.3700 is the next area for the bears to target, followed by liquidity resting below the December low at 1.3642.

 

On the upside, should 1.3900-1.3950 resistance area breaks, then 1.4000 could be a temporary stop ahead of more gains thereafter.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R