USD/CAD trades slightly higher, above 1.3600, amid a US-Japan trade agreement providing short-term relief to the US Dollar. Despite this, the broader outlook remains uncertain due to political issues with the Federal Reserve and increasing trade tensions.
The Canadian Dollar might face volatility as the August 1 deadline for US tariffs looms. US officials confirm the deadline won’t extend, imposing 35% tariffs on Canadian goods not covered under USMCA. Other tariffs include 50% on steel and aluminium, 25% on auto parts, and 10% on energy exports.
Canadian Dollar Resilience
Canadian Dollar resilience is backed by solid domestic fundamentals and US Dollar weakness. Technically, USD/CAD trades below key levels, suggesting a potential market sentiment shift. Immediate support is at 1.3540, with resistance at 1.3661 and 1.3714.
Tariffs are duties on imported goods, supporting domestic manufacturers by providing a price advantage. They generate government revenue like taxes but are prepaid at entry, unlike post-purchase taxes. Economists are divided on tariffs, some viewing them as protective, others as potentially harmful.
Donald Trump plans to use tariffs to support the US economy. In 2024, Mexico, China, and Canada made up 42% of US imports, with Mexico as the top exporter at $466.6 billion, according to the US Census Bureau. Trump’s focus on tariff revenue aims to reduce personal income taxes.
Given the approaching August 1 deadline for new tariffs, we anticipate a sharp increase in USD/CAD volatility. This situation presents opportunities for strategies that profit from price movement rather than just direction. Historical precedent from the 2018 trade disputes, which saw the pair rally towards 1.3600, suggests a bias for a weaker Canadian dollar if the tariffs are confirmed.
Canada’s Economic Picture
We must also consider Canada’s underlying economic picture, which saw inflation cool to 2.9% in May 2024 according to Statistics Canada. The Bank of Canada has already begun an easing cycle with a rate cut in June, which could temper some of the currency’s strength. Therefore, any positive domestic news might be overshadowed by the sheer scale of the threatened import duties.
We believe traders should consider buying options to gain exposure to this expected turbulence while limiting risk. Purchasing call options on USD/CAD would be a direct bet on the tariffs being implemented, causing the pair to rise above resistance levels like 1.3714. The rising implied volatility in the options market indicates that many are already positioning for a large move, making it crucial to act before these positions become too expensive.
Conversely, put options offer a way to profit if a last-minute agreement is reached, which could send the pair sharply lower toward the 1.3540 support level. A straddle, which involves buying both a call and a put, is an effective strategy for traders who are certain of a big move but unsure of the ultimate direction. This hedges against the political unpredictability surrounding the former president’s policy announcements.
The focus on using duties to fund domestic policy is a significant factor, especially since Canada was one of the top three U.S. trading partners. The U.S. Census Bureau data shows total trade between the two nations was over $790 billion in 2023, highlighting the immense economic impact of new barriers. We are therefore watching for any signals that could alter the timeline, as this remains the single most important catalyst for the pair in the coming weeks.
