CAD Struggles as Trade Risks Mount

 Key Takeaways:

*Loonie slips as Canada-U.S. trade tensions escalate: President Trump halts talks over digital tax, raising tariff risks and fueling CAD pressure.

*Weak Canadian growth fuels BoC policy dilemma: Back-to-back GDP contractions increase rate cut odds despite sticky inflation and strong wages.

*Oil, tariffs, and BoC-Fed divergence drive CAD outlook: Traders eye U.S. tariff decision and July BoC meeting as key directional catalysts.

Market Summary:

The Canadian dollar remained on the defensive early this week as escalating trade tensions with the U.S. and signs of weakening domestic growth weighed on sentiment. Investors are closely watching for retaliatory U.S. tariffs following President Trump’s abrupt suspension of trade talks over Canada’s new Digital Services Tax, which targets major American tech firms. The standoff has reintroduced a layer of geopolitical risk that is amplifying the loonie’s vulnerability.

Underlying economic data has added to the cautious mood. Canada’s economy contracted by 0.1% in April, with preliminary estimates pointing to a similar decline in May. The downturn has been concentrated in trade-sensitive sectors—manufacturing output slumped by 1.9% amid tariff uncertainty, while wholesale trade also posted sharp losses. Although gains in arts, entertainment, and public administration offered temporary offsets, the broader trend highlights mounting stress in Canada’s export-reliant economy.

Against this backdrop, the Bank of Canada finds itself at a crossroads. While sticky core inflation (1.7% annualized in May) and solid wage growth (+4.4% YoY) argue for policy patience, weak Q2 GDP estimates and a potential back-to-back monthly contraction are increasing calls for a rate cut at the July 30 meeting. Analysts remain divided, and incoming employment and inflation data will likely guide the BoC’s next move.

From a market perspective, the loonie’s near-term direction hinges on three pivotal factors: the timing and scope of possible U.S. tariffs, the trajectory of global oil prices, and the policy divergence between the BoC and the Federal Reserve. Although crude exports to the U.S. hit record highs in 2024, recent pipeline disruptions have capped production and added downside pressure. Meanwhile, if the BoC turns dovish while the Fed maintains its current stance or delays easing, USD/CAD may push higher.

For now, traders remain cautious, with the loonie caught between domestic fragility and geopolitical uncertainty. The next catalyst may come within days as Washington prepares its tariff response. Until then, the Canadian dollar is likely to stay under pressure, with risks skewed to the downside.

Technical Analysis

USDCAD, H4

USD/CAD staged a notable rebound this week, snapping a three-day losing streak and lifting off support at 1.3650. The bounce follows a textbook technical retest after a completed Head and Shoulders pattern triggered a corrective move from the 1.3750 neckline. Price action now appears to be stabilizing, with bulls attempting to reclaim control and break back above the psychological 1.3700 level. This recovery reflects underlying market interest—but whether it marks the start of a new uptrend or merely a relief rally remains uncertain.

Momentum indicators offer a more cautious picture. The Relative Strength Index (RSI) has edged higher to 52, back above the neutral 50 line. While this reflects improving sentiment, the RSI remains far from overbought territory, suggesting momentum is still developing rather than fully established. Meanwhile, the MACD is attempting to turn positive, with the MACD line hovering just above the signal line. Although a bullish crossover is underway, the histogram remains shallow, and overall momentum lacks conviction. 

This setup creates a dynamic tension. On one hand, USD/CAD’s ability to hold above 1.3650 signals structural resilience, especially following its earlier break above the long-term descending trendline. On the other hand, the presence of a completed topping pattern and subdued momentum indicators leaves the pair vulnerable to renewed selling pressure should macro headwinds reemerge.

Resistance Levels: 1.3850, 1.3750

Support Levels: 1.3650, 1.3575