The collapse of the US-Canada trade deal has weighed heavily on the Canadian dollar. Before the breakdown in negotiations, the loonie had been one of the Forex market’s favorites, supported by a rally in Brent crude and expectations of tighter monetary policy from the Bank of Canada. Let’s examine these factors and develop a trading plan for the USD/CAD pair.
The article covers the following subjects:
Major Takeaways
- The US has imposed new tariffs on Canada.
- The likelihood of a BoC rate hike is declining.
- The trade war will hurt the loonie.
- Long positions on the USD/CAD can be opened with targets of 1.394 and 1.400.
Weekly Fundamental Forecast for Canadian Dollar
What could be worse than a deal falling through? A deal collapsing at the very last minute. Negotiations between the US and Canada had been progressing so well that Donald Trump announced a three-day delay to allow the two sides to finalize the details. However, as the deadline approached, it became clear that the agreement would not be signed. As a result, the USD/CAD pair has posted its strongest daily gain in two months.
US Dollar/Canadian Dollar Rate
Source: Bloomberg.
It could have been worse, as the market had not ruled out such an outcome. That said, the future of the Canadian dollar will depend largely on how the trade war unfolds. This is unwelcome news for USD/CAD bears, who had been feeling increasingly confident. The rally in oil prices driven by the conflict in the Middle East, combined with expectations of a Bank of Canada rate hike in 2026, had made the loonie one of the Forex market’s favorites. This was especially true as the labor market showed signs of stabilization, while inflation stubbornly remained around 3%.
The trade war changed the picture. The deal’s collapse triggered a decline in Canadian bond yields and prompted investors to scale back expectations for BoC tightening. The futures market now prices in a total of 65 basis points of monetary tightening by July 2027, down from 75 basis points before the deal fell apart.
Washington and Ottawa are blaming each other for the collapse. According to a Wall Street Journal source, the draft agreement called for US tariffs on steel and aluminum to be reduced from 50% to 25%, while tariffs on automobiles would have fallen from 25% to 15%. However, opposition from US manufacturers or Donald Trump’s unpredictable approach ultimately brought the agreement to an end.
US Imports and Exports
Source: Bloomberg.
The entire $900 billion trading relationship between the US and Canada is now at risk. New 50% tariffs on roughly $20 billion of Canadian imports have already taken effect, while Prime Minister Mark Carney’s promise of dollar-for-dollar retaliation has angered Donald Trump. The US has also threatened to raise tariffs on Canadian cars, trucks, and auto parts to 50% from January 1, 2027.
Carney has taken a firm stance, arguing that Canada must defend its sovereignty against US pressure. However, investors may question whether a true “tit-for-tat” response is realistic. Canada’s economy is far smaller than the US’s, making sustained dollar-for-dollar retaliation difficult. In any case, further escalation of the trade conflict would be disastrous for the loonie.
Weekly USDCAD Trading Plan
Against this backdrop, the TACO scenario is a long way off, as the trade war is only beginning. However, that scenario remains possible down the road. For now, Canada’s retaliation and any subsequent US countermeasures could push USD/CAD quotes higher toward 1.394 and potentially 1.400. The recommendation is to buy.
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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