Canadian Dollar bears seem hesitant as weak USD counters US-Canada trade war

The USD/CAD pair struggles to capitalize on a bullish gap opening on Monday, though it retains an intraday positive bias amid concerns about a deepening US-Canada trade war. Spot prices currently trade just below the 1.3800 mark, up nearly 0.30% for the day, and, for now, seem to have snapped a three-day losing streak to a three-month low, touched on Friday.

The US imposed 50% tariffs on $20bn worth of Canadian goods on Saturday after trade talks between the two countries fell apart on Friday. In response, Canadian Prime Minister Mark Carney said that the country would impose its own retaliatory tariffs beginning on September 8. This, along with a modest pullback in crude oil prices, undermines the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair.

The US Dollar (USD), on the other hand, hangs near its lowest level in more than three months amid diminishing odds for a rate hike by the US Federal Reserve (Fed). Moreover, the US Treasury announced last week that it would at least double buyback operations for long-dated government debt starting in September, triggering a pullback in US bond yields. This further weighs on the USD and caps the USD/CAD pair.

On the geopolitical front, US Treasury Secretary Scott Bessent is due to announce what he has called the toughest sanctions in history on Iran at a press conference on Monday. Iran's Supreme National Security Council secretary, Mohsen Rezaei, responded by warning that the Islamic Republic would halt all oil exports through the Strait of Hormuz and anywhere else in the Persian Gulf if economic war continues.

Rezaei added that any country participating in the US sanctions would be treated as an act of war against Iran, keeping the war-risk premium in play. This could act as a tailwind for crude oil prices and the safe-haven USD, warranting caution before placing aggressive directional bets on the USD/CAD pair. Hence, strong follow-through buying is needed to confirm that spot prices have bottomed out in the near term.

USD/CAD daily chart

Technical Analysis

The USD/CAD pair keeps a bearish near-term bias beneath the 200-day Simple Moving Average (SMA) at 1.3844. The said hurdle should cap any recovery beyond the 61.8% Fibonacci retracement level of the May-June rally, at 1.3815. A sustained strength, however, could lift spot prices to the 50% retracement at 1.3897, with deeper barriers at 1.3980 and the 23.6% level at 1.4081 ahead of the cycle high region near 1.4246. On the downside, initial support is seen at the 78.6% retracement at 1.3698, ahead of the prior swing low area around 1.3549, where buyers may attempt to stem further losses if the current bearish pressure extends.