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USD/CAD seeks direction amid trade worries ahead of US/Canada GDP

While markets at the start of this shortened trading week continue to be preoccupied by political concerns and the threat of a potential global trade war, most notably between the world’s two largest economies of the US and China, this week’s key GDP releases are also poised to move the USD/CAD currency pair.

Brewing worries about a global trade war have severely affected equity markets in the past several weeks, and have also weighed on both the US dollar and Canadian dollar. In particular, speculation on how the ongoing NAFTA negotiations between the US and Canada will ultimately play out has helped to drive USD/CAD price moves since US President Trump first announced intentions earlier this month to impose substantial tariffs on steel and aluminum imports. Although Trump subsequently allowed temporary exemptions for Canada and Mexico, he made those exemptions contingent upon the outcome of NAFTA renegotiations.

Initially, while overall trade war concerns certainly weighed on the US dollar, the Canadian dollar was pressured even more on the prospects of a significant tariff-related setback for the Canadian economy, as Canada is the largest exporter of steel to the US. While Trump’s subsequent tariff exemption for Canada resulted in some relief for the Canadian dollar, the specter of potentially difficult NAFTA negotiations continued to weigh on Canada’s currency against the US dollar.

On Monday, trade worries eased and equity markets rebounded, modestly paring some of last week’s sizeable losses. This was driven in part by China signaling its willingness on Monday to engage in trade negotiations with the US, purportedly to avert any large-scale escalation of a trade war. Also on Monday, Trump’s trade advisor, Peter Navarro, expressed optimism about the prospects for a successful NAFTA outcome.

Amid potential developments in those negotiations, economic data scheduled to be released in the next few days could also serve as possible market-movers for USD/CAD, even as the pre-holiday event schedule is notably light this week. First up is US GDP (q/q) for Q4 2017 to be released on Wednesday (2.7% annualized growth expected). Thursday then brings Canadian month-over-month GDP for January.

From a technical perspective, USD/CAD tentatively broke down last week below a key uptrend line that outlined the bullish run from the early February lows around 1.2255. Prior to last week’s trendline breakdown, the currency pair hit a high at 1.3124. After the breakdown, USD/CAD has attempted to extend its fall, but has instead fluctuated around the key 1.2900 level. Amid this week’s GDP data and potential news from the NAFTA negotiations, any further alleviation of pressure on the Canadian dollar in relation to the US dollar could help USD/CAD extend its breakdown. In that event, the next major downside target is around the key 1.2700 level.

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