Overview: USD/CAD Spikes as Trade Friction Escalates

The U.S. dollar gained sharply against the Canadian dollar as markets reacted to an unexpected 35% tariff announcement by the U.S. targeting a wide range of Canadian goods. The USD/CAD currency pair jumped to multi-month highs, breaking through the 1.3850 level, as traders quickly repriced risk across North American assets.

The move triggered broad selloffs in CAD-linked assets and reintroduced fears of a new era of trade protectionism between the U.S. and its closest economic partner. Investors are now closely monitoring Ottawa’s response and assessing potential spillover effects on monetary policy, inflation, and cross-border investment flows.

What Sparked the Move: Trump’s New Trade Playbook

Former President Donald Trump, in a campaign speech delivered in Pennsylvania, laid out a hardline trade platform that included a 35% tariff on Canadian imports. Targeted sectors include lumber, paper, industrial metals, and processed food products—all critical components of Canada’s export economy.

The tariff plan is framed as a strategy to “restore fair trade” and protect American industry, but it has already introduced significant volatility into the FX and commodity markets. Canadian exporters now face a substantial cost disadvantage, and forward contracts are being repriced as businesses seek clarity on implementation timelines and exemptions.

Immediate Impact on the Canadian Dollar

The Canadian dollar sold off rapidly in response to the announcement, with the USD/CAD pair surging more than 1.2% in a single session. The loonie is now under pressure from both fundamental and technical angles:

• Trade Deficit Fears: Analysts expect the tariffs to hit Canada’s trade balance hard, with near-term risks of a widening deficit as export competitiveness declines.

• Capital Flight Concerns: Foreign investors may pull back from Canadian assets amid rising uncertainty, especially in manufacturing and raw materials sectors.

• Interest Rate Dynamics: The Bank of Canada may be forced to revise its interest rate outlook, particularly if the tariffs weigh on domestic growth and labor markets.

Market participants are also beginning to price in a higher probability of rate cuts from the BoC in the next 6–12 months, adding further downward pressure on the Canadian currency.

Technical Breakdown: USD/CAD Breakout

From a technical standpoint, the USD/CAD pair has broken decisively above key resistance at 1.3800, with momentum indicators confirming bullish strength. The next upside targets are 1.3950 and the psychological 1.4000 level, which hasn’t been breached since early 2023.

Support for the pair now sits at the 1.3750 region, followed by the 50-day moving average near 1.3670. As long as the tariff narrative dominates headlines, dips are likely to be bought aggressively by momentum traders and hedge funds.

The Canadian dollar is now the worst-performing G10 currency on the week, and volatility in the pair has jumped to its highest in over four months.

Ottawa’s Response and Market Expectations

The Canadian government has not yet issued a formal countermeasure, but officials have hinted at reciprocal tariffs on U.S. exports. Such a move would likely escalate tensions and further destabilize the North American trade corridor.

Economists warn that a full-fledged trade war could knock up to 1% off Canada’s GDP growth in 2025, with heavy sectoral losses in forestry, mining, and manufacturing. Consumer prices may also rise if supply chains are disrupted or if import substitution fails to meet domestic demand.

In the interim, traders are bracing for sharp intraday swings in the CAD as political and economic developments unfold.

Oil Prices and Their Correlation to CAD

The tariff shock comes at a time when oil prices—another key driver of the Canadian dollar—have been trending lower due to global supply dynamics and soft demand from China. This double blow is amplifying pressure on the loonie.

Historically, CAD has maintained a positive correlation with crude oil, given Canada’s status as a top exporter. But with Brent crude slipping under $84 and WTI below $80, the support normally provided by oil strength is absent—leaving CAD exposed on all fronts.

If oil continues to decline or fails to stabilize, analysts believe CAD could weaken further, potentially pushing USD/CAD beyond the 1.4000 mark in the near term.

Broader FX Market Implications

The tariff announcement is not only a bilateral issue—it could signal a return to global trade fragmentation that affects broader currency flows. Other trade-reliant currencies such as the Mexican peso (MXN), the Australian dollar (AUD), and the Norwegian krone (NOK) have also weakened on fears of second-order effects.

The U.S. dollar, by contrast, has benefited from safe-haven flows and yield differentials, as rising Treasury yields attract global capital. The DXY index remains firm near recent highs, and traders are rotating out of risk-sensitive currencies into USD, CHF, and JPY.

If the Federal Reserve signals continued hawkishness or if inflation data remains sticky, the dollar’s strength may persist—compounding the downside risks for currencies like CAD.

Conclusion

The 35% U.S. tariff announcement has redefined the outlook for the Canadian dollar. With the USD/CAD pair surging to multi-month highs and market uncertainty rising, traders are navigating a rapidly changing environment shaped by protectionism, inflation risks, and central bank divergence.

Unless diplomatic solutions emerge quickly, the loonie could remain under sustained pressure in the coming weeks. Investors should expect heightened volatility, policy-driven headlines, and limited relief from commodity correlations as the CAD attempts to find a new equilibrium in an increasingly complex global trade landscape.