USD/CAD is trading slightly higher, just above 1.3600, thanks to a recent trade agreement between the US and Japan, which has provided short-term support for the US Dollar. However, the overall outlook is still uncertain due to political issues with the Federal Reserve and rising trade tensions. The Canadian Dollar could be volatile as the August 1 deadline for US tariffs approaches. US officials have confirmed that this deadline will not be extended, meaning a 35% tariff will be imposed on Canadian goods that are not covered under the USMCA. Additional tariffs include 50% on steel and aluminum, 25% on auto parts, and 10% on energy exports.

Canadian Dollar Resilience

The Canadian Dollar is demonstrating resilience due to strong domestic factors and a weakening US Dollar. Technically, USD/CAD is trading below important levels, indicating a possible shift in market sentiment. Immediate support is at 1.3540, with resistance at 1.3661 and 1.3714. Tariffs are taxes on imported goods that help domestic manufacturers by giving them a price edge. They also generate government income, similar to taxes collected post-purchase, but are paid upfront when goods enter the country. Economists have mixed views on tariffs; some see them as protective, while others think they could be harmful. Donald Trump intends to use tariffs to boost the US economy. In 2024, the US imported 42% of its goods from Mexico, China, and Canada, with Mexico being the largest exporter at $466.6 billion, according to the US Census Bureau. Trump’s aim with tariff revenue is to lower personal income taxes. With the August 1 deadline for new tariffs approaching, we expect significant volatility in USD/CAD. This environment presents opportunities for strategies that benefit from price changes rather than just direction. Historically, during the 2018 trade disputes, USD/CAD rallied towards 1.3600, indicating a tendency for a weaker Canadian Dollar if tariffs are confirmed.

Canada’s Economic Picture

We should also consider Canada’s economic situation. According to Statistics Canada, inflation dropped to 2.9% in May 2024. The Bank of Canada has started a rate cut cycle, which may reduce some currency strength. Thus, any positive domestic news could be overshadowed by the threat of hefty import duties. Traders might want to buy options to navigate this expected volatility while minimizing risk. Purchasing call options on USD/CAD could be a direct bet on tariffs, likely pushing the pair above resistance levels like 1.3714. Increasing implied volatility in the options market suggests that many are already preparing for a significant move, so it’s vital to act before options become too expensive. On the other hand, put options can be profitable if a last-minute agreement is made, potentially lowering the pair sharply toward the 1.3540 support level. A straddle strategy—buying both a call and a put—can be effective for traders expecting a big move but uncertain of the actual direction. This approach helps hedge against the unpredictability of political developments related to the former president’s policy announcements. The focus on using tariffs to fund domestic policies is crucial, especially since Canada ranks among the top three US trading partners. Total trade between the two countries exceeded $790 billion in 2023, underscoring the significant economic impact of new trade barriers. We will be closely watching for any signals that could change the timeline, as this situation remains the key catalyst for USD/CAD in the coming weeks. Create your live VT Markets account and start trading now.

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