The USD/CAD pair ended the year above the critical 1.4000 level for the first time since 2002, driven by market reactions to tariff threats from President-elect Donald Trump. While this development underscores bullish momentum in the pair, it also introduces risks for both sides of the border, particularly in the U.S.
The Canadian dollar has faced pressure amid uncertainty surrounding potential tariffs on Canadian energy exports, a key issue that has fueled the recent breakout in USD/CAD. Bank of Canada Governor Tiff Macklem has emphasized the destabilizing impact of such uncertainty, noting it as a factor weighing on investor sentiment.
USD/CAD Hits a Milestone
For the first time in two decades, USD/CAD closed the year above the significant 1.4000 level. Although this milestone highlights a robust bullish trend, historical patterns suggest this level often serves as a pivot point. The pair has previously tested levels near 1.4700 during periods of extreme volatility, such as in 2016 and during the early months of the COVID-19 pandemic in 2020, before reversing sharply.
Historical Context and Range-Bound Behavior
USD/CAD has exhibited a tendency to revert to its long-term range over the past decade, reflecting the intertwined economic relationship between Canada and the U.S. For example, in January 2016, the pair surged above 1.4000 but retreated below it within weeks, eventually finding support near 1.2500. Similarly, during the pandemic-driven surge in 2020, the pair topped out at 1.4668 before reversing course.
Despite this historical range-bound behavior, the current breakout above 1.4000 has been sustained longer than previous episodes, signaling strong momentum. However, the pair’s ability to maintain these levels will likely depend on how tariff discussions evolve under the new administration.
Tariff Concerns and Inflation Risks
The prospect of tariffs on Canadian energy exports remains a key driver of USD/CAD strength, yet it carries significant risks for the U.S. economy. Higher energy costs could lead to increased inflation, placing additional pressure on the Federal Reserve to raise interest rates. This scenario could hinder corporate growth and weigh on U.S. equity markets, which President-elect Trump is unlikely to favor.
Given the interconnected trade relationship between Canada and the U.S., any punitive measures on Canadian goods or energy could have shared economic consequences, reinforcing the complex dynamics at play in USD/CAD.
Technical Outlook
From a technical perspective, the bullish trend in USD/CAD remains intact. However, key resistance levels loom overhead, including the 1.4500 psychological level, which aligns with the 76.4% Fibonacci retracement of the 2002–2007 major move. Above that, the 2016 and 2020 highs, near 1.4700, serve as additional potential barriers.
On the downside, a sustained move below 1.4000 would signal a return to the longer-term range-bound behavior seen in previous years. Until such a reversal occurs, the bullish momentum is likely to persist, supported by ongoing uncertainty surrounding tariffs and trade policies.
The Road Ahead
As markets await further clarity on President-elect Trump’s trade policies, USD/CAD remains in the spotlight. While the pair’s bullish momentum is undeniable, the potential for mean reversion looms, particularly if tariff threats are scaled back or geopolitical risks subside. For now, the Canadian dollar faces an uphill battle as the new year unfolds.
