While Donald Trump calls Canada the 51st state of the US and its prime minister a governor, Ottawa is entering into a partnership with China. Against this backdrop, the US leader is threatening to impose 100% tariffs on Canada. Let’s discuss this topic and make a trading plan for the USD/CAD pair.
The article covers the following subjects:
Major Takeaways
- Canada and China are lowering tariffs.
- The Trump administration is threatening Canada with 100% tariffs.
- The Bank of Canada has kept its rate unchanged at 2.25%.
- Short trades can be considered as long as USD/CAD quotes are trading below 1.357.
Weekly Fundamental Forecast for Canadian Dollar
Canadian Prime Minister Mark Carney called on small countries at the World Economic Forum in Davos to unite to resist the tyranny of economic giants. In response, Donald Trump is threatening Ottawa with 100% tariffs if the country continues to cooperate with China. However, a full-scale trade war with the US does not scare USD/CAD bears. They are exploiting the greenback’s weakness to push the pair to 16-month lows.
A strong economy is not in vogue these days. According to IMF estimates, US GDP will be the fastest-growing among the G7 countries in 2026–2027, with Canada ranking second. Nevertheless, the US dollar is lagging behind its G10 counterparts in January, not far behind the ninth-ranked Canadian dollar. Meanwhile, what about the basic principle of fundamental analysis: “strong economy, strong currency”? When the US demolishes the old world order, you can forget about it.
IMF Forecasts for G7 Economies
Source: Bloomberg.
At its January meeting, the Bank of Canada confirmed the IMF’s assessment, forecasting a slowdown in GDP from 1.7% to 1.1% in 2026 and an acceleration to 1.5% in 2027. The US tariffs are to blame for this, while the economy, which will adapt to them next year, is to be thanked. In fact, the tariffs are not as high as in other countries. Indeed, the nominal rate is 35%, but it applies only to goods not covered by the North American Free Trade Agreement (NAFTA). If these are taken into account, the average tariff will fall to 5–7%. In 2024, about 75% of all exports from Canada went to the United States.
Tariffs could rise to 100% if Canada signs a free trade agreement with China. This statement was made by Donald Trump and then confirmed by Scott Bessent. The Treasury Secretary noted the deep integration of the Canadian and American economies. Therefore, Washington will not allow Ottawa to become a port for cheap goods from China to the US market.
In fact, the free trade agreement has not been discussed. The Trump administration was outraged by the fact that Canada reduced the tariff on 49,000 Chinese electric vehicles from 100% to 6% in order to reduce tariffs on Canadian rapeseed.
Food Inflation Change
Source: Bloomberg.
Of the 12 experts surveyed by the Wall Street Journal, one expects the Bank of Canada to raise its overnight rate in 2026 due to accelerating inflation. One, on the contrary, expects a decline due to economic weakness. For now, the regulator has opted to keep borrowing costs at 2.25%, which has helped the loonie.
Weekly USDCAD Trading Plan
Despite their gains in the second half of January, USD/CAD bears have a weak position. If the US renegotiates the USMCA, it could be a disaster for Canada and the loonie. If the pair returns above 1.357, long positions can be considered. Until then, short positions can be opened.
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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