It plunged more than 1.4% against the US dollar after Trump threatened to impose new 25% tariffs on goods from Mexico and Canada and increase tariffs on China by 10% immediately after taking office.
Following the announcement, USD/CAD jumped to 1.4170, a high since April 23, 2020. The context is interesting in this case, as a few days earlier, the price of oil entered negative territory for the first time in the story. Previously, the highest price of the pair was recorded in early 2016, when oil fell below $30. Therefore, these were periods of extremely low oil prices compared to current oil prices.
Over the past 20 years, USD/CAD has only reached these levels during periods of turbulence, trading above 1.4100 for only a few dozen days in total in the two episodes of 2016 and 2020. However, the phrase “Period of turbulence” could well apply to the currency market for much of Trump's presidency, with sudden announcements and bursts then dramatically reversing with periods of warm-up and drawdown of tension.
Historically, the Canadian dollar consistently depreciated against the US dollar between 1997 and 2003. This was also due to a period of extremely low energy prices caused by increased supply and the Asian crisis.
USD/CAD has reached levels above 1.4000, with oil prices much more comfortable. A new drop in “liquid gold” prices could be the anchor that brings down the Canadian dollar. However, this relationship has a positive side: the Republican Party often supports the interests of companies involved in the production of conventional hydrocarbons.
Investors face a fork in the road. The first way is to create the conditions for an increase in the price of oil. This could be achieved by increasing purchases from the Strategic Petroleum Reserve or by lobbying for the interests of American companies abroad through tariffs and sanctions.
The second way is to try to maximize overall profits by increasing production, the so-called “drill, baby, drill” that was so expected from Trump's policy.
So far, we see more chances for the first scenario to play out, which could be good news for the Canadian dollar in the long term. However, in the short term, the period of turbulence could continue, suggesting that the best time to open short positions on USD/CAD is yet to come.
On the daily chart, the pair is far from the overbought conditions that reversed momentum earlier and could well fall towards the 1.4500 area and higher before peaking.
The FxPro Analyst Team
