The USD/CAD exchange rate surged to a high of 1.4792 on Monday, its highest level since 2003 and over 67% from its lowest point in 2007. It has jumped by over 10% in the last 12 months as the Canadian dollar crash accelerated. So, how low can the loonie crash amid the ongoing Trump tariffs?
2 reasons why the Canadian dollar is crashing
The Canadian dollar has crashed this year for two main reasons. First, there are risks that the economy will go through a major slowdown as the USMCA trade agreement becomes undone. Donald Trump has started a new trade war by imposing a 25% tariff on most Canadian goods and a 10% on its energy.
Canada has responded by announcing targeted tariffs on American goods worth over $180 billion. Chrystia Freeland, the former finance minister, has warned that Canada should place a 100% tariff on Tesla, a move that will hurt Elon Musk, Donald Trump’s close confidant.
These tariffs will have a negative impact on the Canadian economy which has been slowing in the past few years. Recent data showed that the unemployment rate remained high, while the economy expanded by 1% in the third quarter on a YoY basis. It also dropped for six straight quarters.
Therefore, a trade war with its biggest trading partner will likely lead to more weakness this year as business costs soar.
Fed and BoC divergence
Second, the Canadian dollar has crashed because of the ongoing divergence between the Federal Reserve and the Bank of Canada (BoC).
The Fed has delivered just three rate cuts, bringing the official cash rate to between 4.25% and 4.50%. It has also hinted that it will deliver just two interest rate cuts this year as it remains concerned about the country’s inflation.
A report released last week showed that the personal consumption expenditure (PCE) rose to 2.6%, while the core report remained intact at 2.8%. These numbers remain above the Fed’s target of 2.0% and are struggling to get to the bank’s target of 2.0%.
The Fed may also be forced to increase interest rates if inflation remains at an elevated level because of Trump’s tariffs. The challenge, however, is that hiking rates at a time when the economy is slowing may affect the economic growth.
On the other hand, the Bank of Canada (BoC) has slashed interest rates several times, making it one of the most dovish central banks in the developed world. It will likely react to the tariff threat by delivering more interest rate cuts.
Sustained rate cuts by the BoC will expand the carry trade opportunity, where investors borrow from low-interest rate countries and invest in higher-yielding ones.
USD/CAD technical analysis
USDCAD chart by TradingView
The weekly chart shows that the USD/CAD exchange rate has been in a strong bullish trend in the past few years. It recently jumped above the key resistance level at 1.3912, the upper side of the ascending triangle pattern.
The pair has now retested the key resistance level at 1.4675, the highest swings in March 2020 and January 2016. It has remained above the 50-week and 100-week moving averages, while the Relative Strength Index (RSI) has tilted upwards.
Therefore, the USD/CAD pair will likely continue rising this year, with the next point to watch being the psychological point at 1.5000, up by almost 2% from the current level.
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