- USD/CAD looks ready for more downside after breaking key support—bears might be taking control.
- With Trump delaying tariffs, CAD bulls could see opportunities in EUR/CAD for a potential drop.
- Meanwhile, trade war concerns aren't going away, especially with China and the EU still in the spotlight.
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The US dollar continues to ease back along with bond yields, a move triggered by Trump’s decision to delay tariffs on the USA's northern and southern neighbors on Monday. We have since had weaker-than-expected JOLTS jobs openings and factory orders data from the US, both helping to weaken the dollar index further. Some of the biggest beneficiaries of a weaker US dollar have been currencies of countries that were subject to being slapped with hefty tariffs – including the Canadian dollar.
But a last-minute decision to postpone 25% tariffs on Canada (and Mexico) by Trump following discussions with the leaders of countries, meant that the USD/CAD would reverse sharply after breaking to a new multi-year high momentarily on Monday, as the news also sent risk assets higher and relieved pressure on the Canadian dollar and Mexican peso. Today’s focus will momentarily turn back to data with the release of ADP private payrolls and ISM services PMI. The big day for the USD/CAD is on Friday when official jobs reports from both North American nations will be released simultaneously.
Tariff Threats Remain
While Canada and Mexico averted tariffs, a 10% levy on China took effect yesterday, with Beijing retaliating with new tariffs of its own on selected US imports. Therefore, the threat of a trade war between the world's largest economies remains, even if deals with America’s neighboring countries suggest Trump is willing to negotiate making deals that work for all parties.
However, striking deals with China and the eurozone might be a lot more complicated and will take longer than it did in the case of Canada and Mexico. After all, for those countries, it was just a matter of border security that was the main issue. For China and the Eurozone, it is a lot more than that.
Therefore, markets may remain in a cautious mode for a while yet. For FX, this means that pairs like the EUR/CAD may ease back further following Monday’s decision by Trump to delay the tariffs for Canada. That decision means the near-term Canadian dollar forecast is no longer bearish, making the EUR/CAD an ideal pair to look for bearish setups on for CAD bulls. Meanwhile, USD/CAD is beginning to look rather interesting, as the recent bearish price action suggests there may be a shift in momentum in favor of the bears in the near term.
Trade Idea 1: USD/CAD Technical Analysis and Levels to Watch
The USD/CAD initially rallied on Monday to break above both the March 2020 high of 1.4668 and the January peak of 1.4690, rising to a session high of 1.4793, before slumping on the back of news of tariffs being delayed. The resulting price action was a long-legged inverted hammer candle, which is typically found at the top of major swing points.
However, similar candle patterns have recently been created but there haven’t been much downside follow-through. But this time, we have seen some real downside follow-through in the last couple of days. Is it enough to convince the bears that at least a near-term peak may have been formed on this pair remains to be seen.
Crucially, the USD/CAD has now broken and closed below the key 1.4400 support area, following that sharp reversal. Here, prior resistance met the 21-day exponential average and a rising trend line. The decisive breakdown below this level may have paved the way for fresh technical selling that may see rates go on to break below the recent low of 1.4261. Below that level, round levels like 1.4200 and 1.4100 may then come into focus.
Meanwhile, short-term resistance now comes in around the broken 1.4370-1.4400 region. The next key resistance above that is seen around 1.4500, which was already tested earlier in the session yesterday, and it held. Above that level, the area between the highs of 2020 and 2016 i.e., the 1.4668-1.4690 range marks the next key resistance zone to watch.
Trade Idea 2: EUR/CAD Could Come Under Pressure
Considering the fallout from Trump’s handling of the tariff threat against Mexico and Canada, sentiment in the eurozone has seen a lift, driven by hopes that a deal can be reached, and outright protectionism avoided. That said, caution remains. While Trump’s decision to hold off on tariffs against the US’s immediate neighbours was partly influenced by border security, the same logic doesn’t apply to the EU. On this front, he has the luxury of playing the long game, leaving tariffs in place for an extended period to exert maximum pressure before coming to the table. Unlike Canada and Mexico, tariffs on the EU would be rooted in trade imbalances, typically requiring lengthier negotiations.
Against this backdrop, a sustained EUR/USD rally seems far from certain. Trump has already signalled that the EU could be next in line for trade action, and investors may see better opportunities in currencies that have already weathered the worst of protectionist pressures, unlike the euro, which may still have the toughest battles ahead. This makes the EUR/CAD a firm favourite for the CAD bulls.
The EUR/CAD formed a bearish outside candle on Monday to close well below the key 1.50 handle, before ending the session at just above the 200-day moving average near the 1.49 handle. Given the breakdown of 1.5000 support, the short-term path of least resistance on this pair is now to the downside. If rates now move and hold below Monday’s low of 1.4885, then that could potentially pave the way for follow-up technical selling towards 1.4800 next. The subsequent downside target would be the January low at 1.4685. That said, we now need to see quick downside follow-through. If that doesn’t happen, then the bears may wish to proceed with a bit of care. All bearish bets would be off should the EUR/CAD close back above the broken 1.50 handle now.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.