USD/CAD Faces Pressure as Trade Uncertainty Grows

The USD/CAD exchange rate remains volatile amid rising concerns over potential US tariffs on Canadian exports, according to a UBS report. While a broad 25% tariff has yet to be implemented, uncertainty continues to weigh on market sentiment, with both countries navigating a complex trade landscape.

In response, the Bank of Canada has cut its policy rate to 2.75%, aiming to mitigate economic risks. However, this move also weakens the Canadian dollar’s appeal for carry trades, creating a challenging environment for the currency. UBS analyst Patrick Ernst highlights that Canada faces difficult negotiations, especially with elections approaching in late Q2 and an economy sensitive to high interest rates. The country’s expected response to new US steel and aluminum tariffs could prolong trade tensions, further pressuring the CAD, which has underperformed against peers this year.

UBS strategists warn that markets may be underestimating tariff risks, predicting USD/CAD could climb to 1.46 in the coming weeks as investors price in a higher risk premium. However, they expect a gradual decline toward 1.42 by year-end, driven by broader USD weakness. Key technical levels to watch include support at 1.42 and 1.40, with 1.46 serving as a key resistance point amid ongoing trade developments.