The Canadian dollar continued its strong downtrend against the US dollar after the potential trade war with its biggest trading partner. The USD/CAD pair surged to a high of 1.4177 on Tuesday, its highest level since 2020 and 5.6% above its lowest point in October.
Donald Trump’s trade war with Canada
Trump, the incoming US president, has announced that he will tear down the United States, Mexico, and Canada Agreement (USMCA) on trade on his first day in office in January.
In a statement on Truth Social, he said that he would impose large tariffs on all goods coming from Canada and Mexico.
Those tariffs would go against the USMCA, which he signed during the first term. That deal, which was an upgrade to NAFTA, guaranteed that the three countries would do most of their trade without any tariffs.
Therefore, there is a likelihood that these tariffs will be taken to court since the USMCA Treaty was signed into law by the president.
Large tariffs between the three countries would have major implications on trade. For one, the US and Canada do trade worth billions of dollars a year. The US exported goods worth $356 billion to Canada in 2022 and exported $436 billion worth of goods.
At the same time, the US sold services worth $71.3 billion to Canada and received $44.6 billion. Therefore, these tariffs would lead to a major trade disruption, which would affect the three countries.
Trump has justified the threat of tariffs to migration, which he believes that the two countries are supporting. With the US focusing on the Mexican border, many migrants have started to use the Canadian border to get to the US.
However, based on his past statements, Trump’s core issue is the trade deficit with the two countries. He believes that tariffs will incentivise companies to move from these countries to the US, which is largely impossible because of the cost of doing business.
BoC and Fed divergence
The USD/CAD pair has also jumped because of the potential divergence between the Federal Reserve and the Bank of Canada (BoC).
The Fed has delivered two rate cuts this year. Its first one was a 0.50% cut, which was followed by a 0.25% in the last meeting.
Minutes released on Tuesday showed that the Fed was reconsidering its dovish posture and has hinted that it will be gradual when cutting rates. As such, with inflation rising, analysts expect that the bank will not cut rates in the December meeting.
A key factor that could affect inflation is Trump’s policies on migration and his tariffs, which will be passed on to consumers.
Meanwhile, in Canada, the BoC has delivered several rate cuts, and analysts expect the trend to continue. It slashed rates by 0.50% in the last meeting in October. Analysts see the bank to then cut rates by 150 basis points, bringing the lending rate to 2.25% by the end of next year.
USD/CAD technical analysis
The daily chart shows that the USD/CAD exchange rate has been in a steady increase in the past few years. It has formed an ascending channel, which connects the lowest and highest levels since October 2022.
The pair has moved slightly above the key resistance level at 1.3950, its highest swing in August this year. It has remained above the 50-week and 25-week Exponential Moving Averages (EMA).
The pair has also formed a bullish flag pattern. Therefore, there are signs that the USD/CAD pair will continue rising as bulls target the next key point at 1.4666, its highest level in March 2020. This view will become valid if the pair rises above the year-to-date high of 1.4175.
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