Canadian dollar slumps ahead of the Bank of Canada rate decision

The Canadian dollar is facing some big headwinds in the next few days.

Up first is today’s Bank of Canada decision. The market is fully priced for a rate cut today and there is some talk about a surprise 50 bps move, though that’s an extreme outlier from my perspective.

I expect the Bank of Canada to highlight that it has more dry powder in a tariff war but not offer a signal for the subsequent meeting.

Beyond that, Saturday is Trump’s supposed day to put 25% tariffs on all goods from Canada and Mexico plus 10% on China. The market isn’t priced for that threat as it believes he’s bluffing. I’d note that the Saturday deadline is also instructive as it could allow him to announce something and then walk it back before Monday markets, similar to what happened with Colombia.

What might have the market a bit more worried today is that Canada is doing things like preparing a covid-style stimulus plan and calling for a summit of nations targeted by tariffs. That shows some real concern.

Technically, the picture is more constructive as all this worrisome news hasn’t led to a breakout, though it’s not far off.

The pair could easily stretch above 1.50 if a tariff war kicks off. That said, there is always two-way risk as even if there are tariffs on Monday morning, they could be gone by Tuesday. That will make it challenging to pile into USD/CAD longs too heavily.

It’s also worth noting how aggressively Colombian markets have rallied strongly with the tariff threat passed.

This article was written by Adam Button at www.forexlive.com.