The US Dollar has fallen for four consecutive days, while the Canadian Dollar is gaining strength thanks to positive market sentiment from a trade deal between the US and Japan. The USD/CAD exchange rate has dropped below 1.3600, losing about 1.20% over the past four days and is close to its lowest point this year. Canada is currently in talks with the US to avoid a 35% tariff that President Trump announced. However, hopes for reaching an agreement before the August 1 deadline are low, as neither side’s position has changed. Prime Minister Mark Carney has suggested that Canada might leave the negotiations without a deal.

Crude Oil Prices And Their Impact

Crude oil prices are low due to worries about an oversupply from increased production and decreased demand. As a major oil exporter, Canada could be impacted, which may affect the value of the Canadian Dollar, often called the Loonie. Economists are debating the effectiveness of tariffs aimed at protecting local producers by making imported goods more expensive. Donald Trump plans to use tariffs to boost the US economy while reducing personal income taxes. In 2024, Mexico, China, and Canada made up 42% of US imports, with Mexico at the forefront at $466.6 billion. The tariffs collected from these countries are expected to help lower income taxes. The recent decline in the US Dollar is pushing the exchange rate toward yearly lows. However, this downward trend may face opposition due to fundamental factors, such as Canada’s inflation rate dropping to 2.7% in May. This suggests that the Bank of Canada might have the room to lower interest rates further, which could limit the Loonie’s strength.

Trade Negotiations And Market Volatility

The main source of market volatility is the trade negotiations leading up to the August 1 deadline set by the President. A failure to secure an agreement, a scenario suggested by Carney, could lead to a sharp reversal in current trends. This is reminiscent of the 2018-2019 trade disputes, when previous tariff deadlines caused the VIX, a measure of market volatility, to spike above 40%. Crude oil prices, crucial for Canada’s resource-driven economy, add more uncertainty. While WTI crude has increased to over $80 a barrel due to a recent drop in US inventories reported by the EIA, the market is still sensitive to demand forecasts. Renewed fears of oversupply would put additional pressure on the Canadian Dollar, regardless of the trade outcome. Given these conflicting factors, traders should brace for significant price swings rather than favoring a specific direction. Current market prices indicate that one-month implied volatility for USD/CAD options is high, exceeding 7%. This suggests that the market is preparing for changes. As a result, strategies like long straddles or strangles, which profit from large movements in either direction, may be the most sensible approach. Create your live VT Markets account and start trading now.

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