The Canadian dollar (CAD) has been particularly pressured as President Trump’s lumber tariffs take effect. An extra 10% tariff is due to be slapped on the current tariffs, making it even worse. This development has weighed heavily on CAD sentiment, despite last Friday’s release of Canadian jobs data coming in well ahead of expectations. The USD’s recent performance, bolstered by a push above the 1.40 mark, further complicates the CAD’s position.
The imposition of the new softwood lumber tariffs has caused serious alarm among Canadian traders and economists. The new expected levy on current tariffs would make things even worse. Firstly, the CAD now has to contend with a larger picture of overall USD strength.
Shaun Osborne and Eric Theoret, analysts with Scotiabank, highlighted that “the general trend in the USD remains the primary driver of the CAD’s performance.” Indeed, they noted that the Canadian jobs data provided a short-lived boost. That said, it was far from shielding the CAD from the surge in the USD. That jobs report came in much better than expected. This bad news was not enough to put a dent into the bullish sentiment that has been surrounding the USD.
Technical analysis shows that the USD is currently serving up a hearty helping of climbing towards key resistance levels. Primary 50% retracement resistance of the USD’s Feb-June slide is at 1.4167. Furthermore, resistance for the USD is found at 1.3980/00, while the 200-day moving average is at 1.3973. This technical backdrop offers a psychological buffer against any additional USD gains.
“The USD’s push above the 1.40 area and gains through the 200-day MA (1.3973) confer some additional psychological support on gains. There is little technical protection for the CAD from additional losses in the near-term at least.” – Shaun Osborne and Eric Theoret
Osborne and Theoret noted that “broad USD strength is sustaining spot at a level which appears well above the CAD’s estimated fundamental equilibrium.” They said that this divergence is more than two standard deviations above fair value. They argue that this is excessive in light of recent history.
Strategists now expect the USD to make spot gains into the mid to upper 1.41s. This action implies that the currency is soon headed to retest critical resistance levels. They all reiterated the need for robust technical assistance. Without it, there would be a great danger that the CAD would tank against the USD.