Canadian Dollar Forecast: Trade Optimism Fuels USD/CAD Breakout Bid

• USD/CAD breaks out of descending channel following trade deal news
• Correlation with bitcoin surges to 0.99, highlighting risk-on behaviour
• Key resistance at 1.3947; break above targets 1.4027 and 50DMA
• Bearish momentum eases, favouring neural bias

Summary

The narrative since ‘Liberation Day’ has been that escalating trade tensions and increased uncertainty were more damaging for the U.S. economy than other developed nations. Alongside lingering mistrust from the flippant way the U.S. had communicated policy shifts, it was enough to trigger a major unwind in bullish U.S. dollar positioning.

While neither of those concerns has been fully resolved despite the weekend’s positive tone in trade talks between the United States and China, it’s hard to argue the developments aren’t a net positive for the U.S. economy or dollar—unless the prevailing narrative has quietly changed. With that in mind, the bullish break in USD/CAD may have further to run in the days ahead.

USD Remains Risk Asset

Before diving into USD/CAD’s technical setup, it’s worth reviewing what’s driving the pair right now. The correlation analysis below leaves little doubt the U.S. dollar is behaving more like a risk asset than a safe haven, with USD/CAD tracking bitcoin futures almost perfectly over the past week—an eye-watering correlation coefficient of 0.99 with arguably the riskiest of risk assets.

Source: TradingView

Similarly, the USD has maintained a strong negative correlation with traditional safe havens like gold and the Swiss franc, as well as implied volatility measures such as VIX futures. USD/CAD has also moved closely with 2025 Fed rate cut expectations.

Trade Headlines > Economic Data

As outlined in a separate post on the USD/JPY outlook, while there are several major U.S. economic releases this week—including CPI, PPI and retail sales—tariff policy is clearly dominating U.S. dollar direction. Even if we get a reaction to the data, it may prove fleeting given how quickly the macro landscape is shifting.

USD/CAD Breakout May Have Legs

Source: TradingView

After trending lower in a descending channel over the past month, USD/CAD staged a bullish breakout following news of an interim trade deal between the U.S. and U.K., pushing the pair towards the August 2024 peak of 1.3947.

One glance at the recent price action around 1.3947 shows why it matters. It has acted as both resistance and support either side of the U.S. election and in the wake of Donald Trump’s Liberation Day tariff announcement in early April. While there’s been little reaction to the weekend’s U.S.-China trade developments in Asian trade, if the USD response to the U.S.-U.K. deal is any guide, 1.3947 may come under renewed pressure later in the session.

A clean break and close above the level opens the door to a potential retest of the 200-day moving average and April 3 low at 1.4027. Beyond that, stronger resistance is found around the 50-day moving average and 50% Fib retracement of the September–February rally.

If the August 2024 high continues to hold, look for support at 1.3902. USD/CAD has already bounced off that level once on Monday. A break below may lead to a deeper retracement towards 1.3750, though that looks unlikely in the near term.

Momentum signals are shifting from bearish to neutral, but have yet to confirm a definitive bullish bias.

NOW READ: USD/CHF Climbs, Gold Pressured as Risk Sentiment Improves on Trade Reset

-- Written by David Scutt

Follow David on Twitter @scutty