USD/CAD Edges Higher as Trade Tensions Offset Weak USD

Key Moments:

North American FX Overview

The USD/CAD pair starts the new week with a modest advance but struggles to build on its early gains, even after a bullish gap at Monday’s open. The pair is trading slightly below the 1.3800 level, showing a rise of almost 0.30% on the day. This move interrupts a three-session decline that had driven the exchange rate to a three-month low on Friday.

Trade Tensions and Oil Weigh on the Loonie

Concerns about escalating trade frictions between the United States and Canada are providing support to USD/CAD. The United States imposed 50% tariffs on $20bn of Canadian products on Saturday, following the breakdown of trade negotiations on Friday. In reaction, Canadian Prime Minister Mark Carney stated that Canada would introduce retaliatory tariffs beginning on September 8.

These policy developments, combined with a modest retreat in crude oil prices, are undermining the commodity-sensitive Canadian Dollar and offering a tailwind to the currency pair.

U.S. Dollar Held Back by Fed Expectations and Lower Yields

The U.S. Dollar is trading close to its lowest level in more than three months. Investors see reduced prospects for an additional interest rate increase by the Federal Reserve, which is weighing on the greenback. Adding to the pressure, the U.S. Treasury announced last week that it would at least double buyback operations for longer-dated government securities starting in September, a move that has dragged U.S. bond yields lower.

The weaker yield backdrop is limiting the U.S. Dollar’s ability to extend gains, thereby capping further upside for USD/CAD despite the supportive trade and oil dynamics.

Geopolitical Risks and Oil Market Implications

Geopolitical risk is also in focus as markets await a press conference on Monday by U.S. Treasury Secretary Scott Bessent, who is expected to present what he has described as the toughest sanctions ever imposed on Iran. In response, Mohsen Rezaei, secretary of Iran’s Supreme National Security Council, warned that Iran would stop all oil exports through the Strait of Hormuz and throughout the Persian Gulf if what he called economic war continues.

Rezaei further stated that any country cooperating with U.S. sanctions would be regarded as engaging in an act of war against Iran. Such rhetoric keeps a war-risk premium embedded in markets. This backdrop could lend support to crude oil and the safe-haven U.S. Dollar, prompting traders to be cautious before establishing large new positions in USD/CAD. As a result, the pair will likely require strong, sustained buying interest to confirm that a short-term floor is in place.

USD/CAD Technical Landscape

USD/CAD continues to display a negative short-term technical configuration while it trades below the 200-day Simple Moving Average (SMA), currently at 1.3844. This level, together with the 61.8% Fibonacci retracement of the May-June advance at 1.3815, represents a key resistance zone that may constrain recovery attempts.

If buying momentum were to strengthen and overcome the 1.3815-1.3844 resistance band, the pair could extend higher toward the 50% retracement at 1.3897. Above that, additional upside obstacles are located near 1.3980, then at the 23.6% Fibonacci level at 1.4081, ahead of the cycle high zone around 1.4246.

On the downside, initial technical support is located at the 78.6% retracement at 1.3698. Below this, the previous swing low region around 1.3549 may attract buyers attempting to counter any further extension of the prevailing bearish pressure.