Canada recently eased trade tensions by lifting many retaliatory tariffs on U.S. imports under the USMCA agreement. This adjustment aligns Canada’s tariffs with U.S. exemptions and aims to restart stalled trade talks. Tariffs on U.S. steel, aluminum, and autos remain, despite previous concessions like a scrapped digital services tax.
Future Currency Outlook
Following this, Canadian and U.S. officials plan to engage in discussions to progress negotiations. Meanwhile, the Canadian dollar is weakening against the U.S. dollar, with USDCAD moving higher amid general dollar buying. On Friday, the U.S. dollar experienced a sharp fall, but today, funds are flowing back into dollar purchases.
Technical analysis shows the low prices from Friday and today stalled between 1.3813 and 1.3832. Currently, the trading price is at 1.3847, sitting above this support area after holding firm today.
Canada’s recent decision to lift some tariffs is a positive step, yet the market is ignoring it for now. The immediate weakening of the Canadian dollar, with USDCAD rising, shows that traders are focused on broader forces. This suggests the positive trade news is being overshadowed by more powerful macroeconomic drivers.
We see this divergence as being driven by central bank policy expectations. With recent US inflation data from July 2025 coming in at a persistent 3.5%, the market is pricing in a more hawkish Federal Reserve. Meanwhile, Canadian inflation has cooled to 2.7%, fueling speculation that the Bank of Canada may cut rates sooner, widening the interest rate differential in favor of the US dollar.
Trading Opportunities
The technical picture supports this view, as USDCAD found solid footing at the 1.3813-1.3832 support zone last week and again today. This successful test indicates that buyers are stepping in, viewing dips as opportunities to get long on the US dollar against the Canadian dollar. The price holding above this area strengthens the case for further upside.
For derivative traders, this suggests positioning for continued USDCAD strength in the coming weeks. Buying call options on USDCAD could be an effective strategy to capitalize on potential upward moves while managing risk. Looking at options with expirations in September or October 2025 would capture this ongoing theme of policy divergence.
We saw a similar pattern back in the 2022-2023 period, where aggressive rate hikes by the Federal Reserve consistently overshadowed other economic news, driving sustained US dollar strength. History suggests that when central bank policies diverge this clearly, it becomes the primary driver for currency pairs like USDCAD. This reinforces the idea that the current trade news is likely to remain a secondary factor.
