Canada is considered one of the main victims of global trade wars. However, the fall of the USDCAD pair suggests the opposite. What are the factors contributing to the Canadian dollar’s strength? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Canada will keep its overnight rate at 2.75%.
- Canada’s economic strength is short-lived.
- Trade wars do not bode well for the Canadian economy.
- Short trades can be considered if the USDCAD pair drops below 1.37.
Weekly Fundamental Forecast for Canadian Dollar
According to Rosenberg Research, the strength of the Canadian dollar is merely illusory. The decline in USDCAD quotes from its 10-year high in early February to an 8-month low in June was not driven by fundamental market forces. Canada is currently experiencing low productivity, a recession in terms of GDP per capita, and unemployment, which is on the verge of surpassing 7%. The Canadian dollar has appreciated 4% against its US counterpart since the beginning of the year, driven by capital flight from the US securities market.
Currently, Canada is grappling with the repercussions of trade wars. The industry is facing challenges due to tariffs on automotive, steel, and aluminum products. In addition, tariffs on the latter will increase from 25% to 50% overnight. Logging, pharmaceuticals, and semiconductors are vulnerable to disruption. Mark Carney’s reaction to the World Trade Organization’s ruling on US import duties was predictable. However, the cancellation of the tariffs is still pending.
Despite Canada’s GDP growth acceleration from 2.1% to 2.2% in the first quarter, it is premature to draw conclusions. The front-loading of US imports ahead of the introduction of large-scale tariffs on Liberating Day was the main driver. According to experts at Bloomberg, the economy is expected to contract for two quarters in 2025, a development often referred to as a technical recession. The OECD has indicated a potential slowdown in GDP to 1% for the year.
Canada’s GDP Change
Source: Bloomberg.
At the same time, the Bank of Canada can extend the pause in its monetary expansion cycle that began in April due to faster GDP growth and inflation. The BoC commenced a reduction in its overnight rate from 5% in June 2024, lowering it to 2.75%. The futures market currently indicates a 20% probability of a significant increase in borrowing costs at the June 4 meeting. Eleven out of 13 experts surveyed by the Wall Street Journal do not anticipate any change.
However, concerns about the impact of trade wars on the Canadian economy could potentially lead to a resumption of the cycle in the future. Canada urgently requires fiscal and monetary stimulus. The futures market is anticipating two rate cuts in 2024, with a particular focus on September. The number is equivalent to that of the Fed.
BoC Rate Cut Expectations
Source: Bloomberg.
I concur with the assessment by Rosenberg Research that the loonie’s strengthening is likely a mirage. Recent GDP data only serves to reinforce this perception. Indeed, USDCAD bears are drawing strength from capital flight from the US securities market amid policy uncertainty and fiscal problems in the US.
Weekly USDCAD Trading Plan
Against this backdrop, short trades on the USDCAD pair can be considered with targets at 1.362 and 1.355 on a breakout of the support level at 1.37 or on upward pullbacks within the prevailing downtrend.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCAD in real time mode
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