Canada supplies approximately 20% of the oil consumed in the US, so introducing 25% tariffs on Canadian goods could be a huge mistake. However, resisting Washington may prove challenging without strong political leadership in Canada. Let’s discuss it and make a trading plan for USD/CAD.
The article covers the following subjects:
Major Takeaways
- Political crisis weakens the loonie.
- Outside of oil, the US has a trade surplus with Canada.
- Ottawa’s revenge will hit the US economy hard.
- USD/CAD risks soaring to 1.455 and 1.48.
Weekly Fundamental Forecast for the Canadian Dollar
Amid rising patriotism sparked by fears of US dominance, Canada grapples with the absence of a strong leader able to resist Trump’s attacks. The resignation of Justin Trudeau, who served as Prime Minister for nine years, has left the Land of the Maple Leaf adrift. Still, that could be better than bowing to its southern neighbor.
What doesn’t kill you makes you stronger. The political crisis, Donald Trump’s aggressive rhetoric, 25% tariffs on Canadian imports, and the central bank’s active rate cuts have added fuel to the fire of Canada’s economic struggles. Rising unemployment and slowing domestic demand are straining the economy, and Trump’s proposed taxes only exacerbate the situation. Bank of Nova Scotia estimates that, coupled with Ottawa’s retaliation, they will add CA$ 20-30 billion to Canada’s budget deficit and hamper fiscal plans, no matter who wins the next election.
Trump, meanwhile, asserts that the United States does not benefit from its trade relationship with Canada, citing a $60 billion trade deficit. However, this claim overlooks a key fact: the United States depends heavily on Canadian oil. Americans consume approximately 20 million barrels of oil daily but produce only 13.2 million. Canada supplies 4.3 million barrels daily. Without these imports, the US might achieve a trade surplus with Canada.
Dynamics of the US and Canada Trade Balances
Source: Bloomberg.
Trade between the two countries is quite balanced: for every $85 million of goods purchased in the States, Canadians sell products worth $100 million. According to insider information from Bloomberg, Ottawa’s retaliation, which has already been discussed, could be very painful for American producers of juices, bathroom equipment, and certain steel products.
US Trade Deficit and Balance
Source: Bloomberg.
I believe Washington is firmly hooked on Canadian oil and is unlikely to impose a 25% tariff on all imports from its northern neighbor. More likely, we will see a selective application of import duties. If that’s the case, USD/CAD risks a sharp decline, similar to what happened during trading on January 6, when the Washington Post reported that Donald Trump’s team was working on tariffs on critical imports.
Weekly Trading Plan for USD/CAD
However, until the US President announces his verdict, the political crisis, divergence in the Fed and the Bank of Canada’s monetary policies, and differences in economic growth will continue to push USD/CAD quotes upward to the previously announced targets of 1.455 and 1.48. At the same time, strong US labor market statistics for December will allow us to build up longs.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCAD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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